First things first, let’s talk about the top 5 mistakes people make when it comes to managing their finances so you can keep as far away from them as possible.
Mistake #1: You haven’t made a budget to begin with.
According to a 2022 Gallup report, only one in three people creates an extensive budget (even fewer actually stick to it), which means two-thirds of Americans have no idea where their money is going.
Not keeping track of your money is one of the most dangerous financial mistakes you can make.
With a plan in place, you can avoid the pitfalls related to spending more than you earn.
There are a number of underlying reasons people don’t create budgets, one being the assumption that budgeting is too difficult.
Luckily, with financial advisors like myself offering advice and recommendations for free budgeting tools, creating your own budget is easier than ever.
Along those lines, people avoid budgeting like the plague because, even with the aid of streamlined budgeting services, it takes time and effort.
It’s easy to fall into the trap of putting your budget off until tomorrow, which, as you know, never comes (otherwise, you’d have a budget).
Even if your current income is substantial, ends are meeting, and debt is getting paid down, you need a budget.
Life can change in an instant, and if you aren’t budgeting, your finances aren’t secure.
It’s as simple as that. Convinced yet? Let’s move on.
Mistake #2: Your budget doesn’t match your personality.
In order for a budget to work, it has to fit your personality and lifestyle, and your family’s.
If you have a more casual attitude about money, completely denying yourself any cash for free-spending purposes could doom your budget.
You may have to allow at least a small percentage of the budget for discretionary spending.
But keep in mind that the goal is to reform your spending habits, not give you a license to mow through every cent you’ve saved.
Without going too far, you have to partially construct your budget around preferences – yours, your spouse’s, and even your children’s.
Mistake #3: You’re a yo-yo budgeter.
Perhaps you’ve heard of the term yo-yo dieter, a person who has a long history of on-again, off-again dieting (I’m the perfect example since I go from strict paleo one week to chowing down six doughnuts the next.)
Though they have a desire to lose weight, they lack the will or the discipline to stick to it.
What makes this trend even worse is the fact that yo-yo dieting can actually cause the dieter to gain more weight than they lose over the long-term.
The same could be true of you when it comes to budgeting.
You have a strong desire to get control of your finances, but you lack the discipline and/or the commitment to implement a budget and stick with it for more than a few months, or even a few weeks.
And, much like a yo-yo dieter, a yo-yo budget can leave you in worse financial shape than when you started.
Though you may be able to lighten your budget after a year or so, when you first begin you’ll have to be very strict – something like a Budget Boot Camp – which will force you to make radical changes in your life.
But even if you get past the Boot Camp phase, you still have to retain the basic elements of your budget for the foreseeable future.
No backsliding is allowed!
Mistake #4: Your Budget Isn’t Flexible (or Realistic)
Since expenses tend to rise and fall from one month to the next, your budget will not work if there isn’t a certain amount of flexibility built into it.
When there is a surplus in your budget, bank it to have available to shore up the months when your expenses are higher than normal.
Some months simply have more expenses than others, and they seem to come out of nowhere.
In other months you can actually fall off the wagon – you spend more than you should, and it puts you in a bit of a hole.
That’s actually normal; as long as it doesn’t happen too often, and as long as your budget has enough flexibility to work around it, you’ll be fine.
Just make sure you aren’t constantly relying on the flexibility of your budget to continue those bad spending habits.
Likewise, plan for contingencies.
While it’s fairly easy to build a budget around fixed monthly expenses like your house payment and debt payments, you still have to make an allowance for contingencies.
For example, if you are driving two cars and both are over five years old, you should make a monthly allowance for car repairs, even (and especially) in the months where none are required.
Mistake #5: Your Budget Is Imbalanced or Inaccurate
Budgets need balance.
If you’re spending too much on certain expenses and not enough on others, the imbalances can eventually cause you to abandon the budget entirely.
For example, If you are allocating too much money to pay off credit card debt and not putting any money into savings, or spending too little on groceries, you could be sabotaging your budget.
If you want to make your payments more effective, take out one of the best credit cards for balance transfers and zap that debt into oblivion with 0% interest for a year or more.
Maybe you can get along without balance for a few months, but if it takes a couple years or more to pay off your credit cards, you will more than likely abandon your budget long before that happens.
On the opposite end of the spectrum, you might need to scale back your entertainment and miscellaneous budget to pay off debt and cushion your savings account.
If you’re spending more than you’re making, creating a budget and trying to live within it is a complete waste of time. You have a more fundamental issue that will have to be resolved first.
If your expenses are higher than your income, you have three choices:
Cut your expenses.
Increase your income.
Use a combination of both.
Once you get your income and expenses in balance, then you’ll be ready for a budget.
Source: www.goodfinancialcents.com
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