February 20, 2023
A budget is the cornerstone of good personal finance. But a budget will only work for you if you work your budget. It’s not a “set it and forget it” financial tool. Rather, it requires frequent tracking and logical revisions over time. Without this active participation, you’re likely to overspend and undersave — a dangerous combination that goes against your financial health.
Want to stay financially fit? Make sure you avoid these five common budgeting mistakes.
Back when writing checks was an everyday practice, people would write down the amount of each transaction and balance their checkbook. Now, people simply tap their debit card and go. But not tracking your spending can be hazardous. If you don’t know how much you’re spending, you could quickly find yourself overdrafting — spending more than you have in your bank account. And if you’re not careful, overdraft fees can total hundreds of dollars a day, making a bad situation even worse.
This is one reason it’s important to always know just how much you’re spending. You can do this by setting up spending alerts — in your banking account, your favorite financial tracking app, or elsewhere — if you don’t want to track your transactions by hand. Just make sure you track them. If you don’t, you could throw your entire budget out of whack before you realize it.
Many people make the mistake of guessing at their monthly bills. They might know the general ballpark of how much certain things cost, but not the exact amounts, which is worrisome. Because if you don’t know what your expenses are, you won’t know for sure whether you have enough income to cover them all.
Even a slight difference in expense amounts can start to add up, especially if it causes you to overdraft — or undersave. And remember that your current expenses can change, such as if a gym membership, streaming service, or other subscription plan increases. Or when your utilities usage varies throughout the year (the electricity bill looks a lot different when you’re inside all winter versus when you’re outside all summer).
So, just as it’s important to track your spending, it’s important to track your expenses. That way you can adjust your budget accordingly and, if needed, make money-saving lifestyle changes in advance.
Here’s a not-so-fun fact: Nearly 1 in 4 U.S. adults have no emergency savings at all. And more than half of American adults don’t have enough savings to pay for an emergency expense of $1,000 or more.
You don’t want this to be you. Because if you don’t have an emergency fund for when the unexpected happens (e.g., a job loss, a car wreck, a medical emergency), the unexpected could wreak havoc in your life. That’s why it’s good practice to include an emergency fund allocation in your budget — it helps you safeguard your family financially by steadily increasing your savings each month.
Building an emergency fund can be as simple as setting up an additional savings account with your bank and depositing funds as your budget dictates. Or you can open a high annual percentage yield (APY) savings account at a different bank, so your fund grows even faster by accruing interest. Either way, it’s good practice to keep your emergency fund separate from the rest of your savings. This can help dissuade you from using it for non-emergencies.
Budgeting with a partner is often harder than budgeting by yourself. Simply because it’s harder to get on the same financial page with another person than it is to set and act on a financial plan on your own. And if you and your significant other can’t see eye-to-eye, things can get stressful quickly.
Many people make the mistake of not having an open dialogue about expenses. For instance, a couple may fail to inform each other when they make a purchase, even though they share a bank account, making it easy to purchase the same items twice or overspend in a category, such as eating out. This can lead to overdrafts and the correlating fees, adding an unnecessary financial strain on the relationship.
To avoid this, try sitting down with your partner and figure out a system that helps you both stay on the same page. And make sure you have regular check-ins, such as a monthly budget meeting. This helps ensure you are aligned about savings goals and other financial priorities, making it easier to achieve them while still setting aside funds for date nights. Talking about money may be uncomfortable at first, but it’s a breeze compared with the consequences that might come from not discussing your finances.
Nearly 8 in 10 Americans say they feel like they can get by without monthly budgeting. But if you don’t know how much money is coming in, where it’s going out, and how much is going out, there’s a good chance you’ll wind up in a tough financial situation sooner or later. After all, in addition to helping you track your current spending, budgeting helps you make sure you put enough in savings and investments. Without it, you might not set aside enough to put a down payment on a home or retire as early as you want to.
Not sure how to create a budget? Not to worry. You can do it in three easy steps:
If you don’t have a budget, now is as good a time as any to sit down and make one — either from scratch or by using a budget template. It won’t take a long time to complete, and it may provide the peace of mind that comes with knowing where your money is going. Even if you doubt the value of budgeting, it’s better to be safe than sorry.
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