8 Budgeting Mistakes and How to Avoid Them

It’s easy to feel like a fish out of water when it comes to managing your finances. A good starting point for figuring it out is creating a budget. While your budgeting roadmap may differ based on your situation, there’s one thing all first-time budgets have in common – rookie mistakes! Common mistakes can derail even the best-laid plans. Follow along as we highlight some of the top budgeting mistakes and offer tips on how to avoid them.

 

#1 – Not having clear goals.
Without clear financial goals, it’s challenging to stay motivated, let alone stick to a budget! Defined goals lead to smarter financial decisions and a sense of reassurance and confidence.

 

Solution: Set specific, measurable goals for saving. Whether it’s saving $1,500 for a vacation or putting 5% of your take-home pay toward building an emergency fund, having clear objectives and timelines will help you stick to your budget and reach your goals at the same time.

 

#2 – Failing to put your budget in writing.
Having clear goals is step one, but it doesn’t mean much without a defined and trackable budget. It’s easy to lose track of your budget when it’s just an idea in your head.

 

Solution: Whether you use a piece of paper, an Excel template, or a budgeting tool like Money Management from BHFCU, writing out your budget categories and allocated amounts helps keep you honest and on track.

 

#3 – Not actively tracking your spending.
A budget isn’t a one-time activity. Many people create a budget but fail to track their actual spending. This makes it easy to overspend without realizing it and to lose sight of your goals.

 

Solution: Use budgeting tools or apps to actively monitor your spending. Many of these tools automatically categorize your expenses and send alerts when you’re nearing budget limits. We suggest regularly categorizing your spending (daily or weekly) and reviewing your progress to budget and goals often (monthly or quarterly). 

 

#4 – Underestimating irregular expenses.
It’s common to underestimate irregular expenses like semi-annual insurance premiums or holiday gifts. You may be on the right track all year until one of these busts your budget.

 

Solution: Review your past spending to quantify the annual amount you should save to cover your irregular expenses. Divide all those annual, semi-annual, and quarterly expenditures to get a monthly amount to set aside. A dedicated savings account to separate this fund can be a helpful tool.

 

#5 – Ignoring small purchases.
Although they may not seem like much alone, small, frequent purchases can add up quickly and throw off your budget.

 

Solution: Track all purchases, no matter how minor they seem. If you’re looking to decrease this line item on your budget, consider limiting discretionary spending by setting a monthly allowance for non-essential items.

 

#6 - Being too restrictive.
Budgeting doesn’t have to mean forgetting the fun. Too much restriction can lead to frustration and abandonment of the budgeting process.

 

Solution: Allow for some flexibility and fun in your budget. Allocate a portion of your income to entertainment or hobbies to make your budget sustainable.

 

#7 – Failing to adjust your budget over time.
Life changes fast. Factors like a new job, a move, or swings in the price of goods like groceries and gas can make a budget outdated and ineffective.

 

Solution: Review your budget quarterly and adjust it as needed to reflect realistic amounts by category.

 

#8 - Not planning for unexpected expenses.
It’s common to underestimate expenses, especially unexpected ones like car repairs and medical bills. Without proper planning, unexpected expenses can lead to financial stress.

 

Solution: Prioritize building an emergency fund with living expenses for three to six months. Start small and gradually increase your savings. This fund will help you avoid financial strain when surprises arise.

 

Budgeting is a powerful tool for achieving financial stability but requires diligence and flexibility. By making a plan and avoiding these common mistakes, you, too, can be on the right track. Want to dive into more budgeting goodness? Check out our recent Essential Budgeting Tips for the New Year blog.