Budget Mistake #1: Not Having One
There is no way around it... making a budget sucks. It's scary. I mean, what if you don't like what you find? Besides, isn't there a saying "ignorance is bliss?"
You may want to avoid it but making a budget and some financial adjustments is much less painful than being in crippling debt. It hurts, but being broke hurts much more. Part of the problem is that budgeting has traditionally meant sacrificing things you love and embracing a pauper's lifestyle. Keep reading and we'll talk about some alternatives.
Budget Mistake #2: Forgetting About Income Tax
Pretend you have a salary of $50,000; That doesn't mean you take home a twelfth of that each month. Income taxes take a cut before you ever touch that money. If you calculate your max spending using your salary then you are pretending you have several thousand dollars that you... well... don't. In this instance, you would be over-estimating your take-home pay by around $12,000.
Below you will see the rate at which you were taxed in 2018.
|Rate||For Unmarried Individuals, Taxable Income Over||For Married Individuals Filing Joint Returns, Taxable Income Over||For Heads of Households, Taxable Income Over|
Budget Mistake #3: Not Having a Category for Emergencies
Emergencies and the resulting surprise expenses are an unavoidable part of life. The only way to prepare for the unknown is to acknowledge that things happen and to build up of a financial cushion. Consider the cost of the following emergencies;
Auto Repairs - The most common auto repair is to replace the oxygen sensor. This typically costs $250.00
Home - The most common home repair is a clogged or leaky sink and the average plumbing bill is between $160 and $430.
Health - The typical cost for a medical visit for an illness ranges between $130 and $180.
Hopefully, you won't experience any of these scenarios soon, but it would be unrealistic to think that they will never come up. The general recommendation for an emergency fund is that it is large enough to cover 3 to 6 months of your total living expenses. Coming up with that amount all at once is hard, so set up a monthly contribution. Any month you don't need to use it will be an addition to that fund.
Budget Mistake #4: Thinking You Can Live without Fun
Sure, you can save a ton of money if you only sit in a dark room and drink water... but how long can you keep that up? This budget will 100% fail. Besides, a budget is about taking control of your finances so you can spend your hard earned money on things that actually matter to you. It's about living the life you want to live. If you cut out fun... then what's the point?
A general rule of thumb is to budget between 5% and 10% of your paycheck for fun. This might change depending on emergencies or big saving goals, but the important lesson is to make sure that you factor in some number here.
Budget Mistake #5: Failing to Revisit the Budget
As your financial situation changes, so should your budget. Did you get a raise? Change the budget. Did you spend a lot of money on gifts? Reflect that in the budget. Sign up for a cool new service that delivers a fancy cheese to your doorstep once a month? I mean, cool, and put it in the budget.
How often should you revisit your budget? Every month. Ask yourself the following questions:
- Are all my expenses accounted for?
- Are all my income streams reflected here?
- Am I overspending on anything I don't care about or don't need?
- Am I tracking well towards my saving goals?
- Am I paying down the right debt?
Budget Mistake #6: Making it Hard
Don't reinvent the wheel! There are a ton of cool tools out there to make budgeting easier. If you're looking for a free budget template, check out these:
- Budgets Are Sexy provides this free template. It is great for a bigger view of your finances (like your net worth and credit cards) but misses out some of the categorizing of your expenses.
- Mint.com offers a very basic version. You'll probably need to add categories.
- If you like counting every penny, then this template from Money Under 30 is for you.
Or, if you want a budgeting app, try one of these:
There are plenty of other options out there, but a quick word of caution: Many budgeting apps will need to link to your bank account. Make sure you check the number of downloads, app reviews, and star rating before you give an app access to your bank accounts. The last thing you need is to grant a malicious service access to your finances!
Budget Mistake #7: Not Negotiating
Before you cancel your cable service or skip out on a coffee, try negotiating down your bills or shopping around for better deal.
- Are there any loans you can refinance? Banks and Credit Unions are always competing on rates and if you made a big purchase (like a car or a home) when your credit wasn't so good, then you should shop around for a new rate. NerdWallet has this cool calculator that shows you how much you can be saving by refinancing a loan.
- The other trick is to shop around for accounts that pay better rates. The average APY on a checking account is .06% and many of the biggest banks pay .01%. At those rates, a balance of $10,000 would earn a pathetic $6 a year. If you could find an account that offered APY of 1% (we know several), you would be earning $100 a year on that same balance. $94 a year just for switching where you bank.
- Have you ever signed up for a service at an introductory rate and then a year later the price jumps? Yea... Companies spend a lot of money trying to attract new customers and if you threaten to leave for another provider they will usually be willing to try and negotiate a deal or put you back into that introductory offer. You can do this yourself or you can sign up for an app to do it for you.
Budget Mistake #8: Focusing Only on Saving
There are two sides to every budget; what you spend and what you earn. Which is easier; cutting another $100 from an already thin budget or figuring out how to earn an extra $100 a month?
More than a third of all Millennials have a side gig and starting one can be a great way to solidify your financial standing without sacrificing your quality of life. To help out, we put together a list of our favorite side hustle ideas.
Budget Mistake #9: Guessing
Imagine if you went to check your bank balance and the receipt said: "You have about $1,000."
About? Not cutting it. You want to know exactly how much money you have. Heck, if banks allowed more than 2 decimal places, that's what I would want to see.
When it comes to making our budget sometimes we let the rough guesses slide. "Electic bill is usually around this" or "I spend about that on food." These estimates can be wrong and the discrepancies can add up into being hundreds of dollars off from your expected expenses. The result: an avoidable budget crunch.
Budget Mistake #10: Forgetting About Semi-regular Expenses
How many subscription services charge you just once a year? (Hello, Amazon Prime)
When constructing your budget it is easy to remember all of the services you are billed for on a monthly basis, but it's much harder to recall those less frequent charges. They add up. Some services to consider when budgeting are:
- Website hosting
- Streaming services
- Online classes or tuition
- Insurance payments
- Retirement contributions
- Charitable giving
- Quarterly Taxes
- Union dues or organization membership fees
- Holidays and gifts
Take those bills and divide them by 12, then commit to saving a portion of that expense every month. For example, I have $100 subscription billed monthly, so I put away $8.33 every month in preparation for that larger bill.
There is another benefit to building an effective budget: Taxes. While you're going through the process of constructing your budget make sure you consider how you will store your receipts. Many of these expenses can be tax deductions and by tracking your spending and maintaining accurate records, you can make claiming these deductions a breeze.