If you’re one of the 65% of Americans who don’t know what they spent last month, you either don’t have a budget or have one but are falling into budgeting traps. Having a budget is only half the battle — you also have to know how to use it effectively.
In this guide, we’ll cover nine mistakes you might be making with your budget and how to avoid them.
Relying on budget estimates
One of the biggest budgeting mistakes you’re making is relying on spending estimates instead of real numbers.
Many budgets fail because people guess their income and expenses without reviewing their bank statements to confirm their estimates. You will likely not have a very accurate budget without double-checking your numbers.
The mistake many people make is estimating what they spend without digging deeper to confirm the information. Here are two steps you can take to avoid this trap:
- Review your spending in each category (credit/checking account statements or online/app)
- Use those numbers as the base of your budget instead of just picking a random number from your head.
Many people create budgets and then give up too soon because they did not use accurate numbers from the beginning. For example, you might estimate spending $300 on groceries per month and putting that amount in your budget. But when reviewing last month’s spending, you uncover that you spent closer to $800. You’re going to wonder why you’re broke when all you had to was look at your past spending to come up with a more accurate estimate.
Unrealistic expectations
Another mistake with your budget is having unrealistic expectations about your income or expenses. Let’s say you review your account statements and learn that you’re spending $600 a month at restaurants — don’t set yourself up for failure by trying to go from $600 to $0 a month. Try knocking $100 off the amount until you get to the monthly restaurant budget you’re comfortable with.
The same goes for income. You don’t want to over or underestimate your income as that can cause problems with your budget. If you’re expecting a bonus or commission, be conservative and assume it will be lower than you expect. It’s always better to underestimate than overestimate with budgeting.
Not budgeting your net income
If you receive a paycheck, you’ve probably noticed the difference between your “gross pay” and “net pay.” Gross pay is your earnings before taxes and other deductions such as health insurance and savings to your 401k, and net pay is what you take home. The numbers in your budget should always be based on your net pay, not your gross pay.
If you budget using your gross pay, you will likely spend out of your means because gross pay isn’t the amount you have in your pocket. For budgeting purposes, stick with net pay.
Not comparing estimated vs. actual spending
A crucial step in the budgeting process that most people miss is comparing what you budgeted versus what you actually spent in real life. The point of budgeting is estimating, then reviewing and refining over time until you have a budget that most accurately reflects real life. The only way to do this is by taking the time to review your estimated vs. actual spending.
No financial goals
If you don’t have financial goals, it will be hard to keep your eyes on the prize. If you aren’t working towards anything specific, you might not be motivated to stick to your budget. Budgeting isn’t just about the day-to-day details of your spending; it’s about the big picture and vision for your life.
If you have a goal in mind, it might be easier for you to cut your spending because you’ll know that it’s for a good reason. In fact, with a goal in mind, it might motivate you to cut more from your budget and not even feel like you’re limiting yourself. Instead, it might be freeing because you know you’re working towards a bigger goal and not just focused on getting by.
Using complicated budget software
If you’ve never budgeted before, going from zero experience to advanced budgeting tools sets you up for failure. Sometimes a simple pen and paper or basic budgeting spreadsheet is the best option.
When it comes to budgeting, it’s best not to overcomplicate things. Start with the basics — a simple list of your income and expenses on a piece of paper or spreadsheet. Once you’ve successfully followed your budget for a few months, you can move on to fancier budgeting tools if you desire.
Not having an emergency fund
Over half of Americans don’t have enough savings to cover three months of living expenses — leaving most of the population financially vulnerable. Many Americans are one financial crisis or job loss away from draining their savings.
One unexpected expense can throw your budget out of whack if you don’t have an emergency fund. Depending on the severity of the expense, it could take your budget months to recover. An emergency fund takes away this uncertainty.
How can you start building your emergency fund if you don’t have one already? Review your budget to see how much money you have leftover or if you can cut expenses and start saving instead. Utilize automatic savings, so it’s out of sight, out of mind. The longer extra money sits in your checking account, the more likely you will spend it.
Reviewing your budget infrequently
Budgeting is an ongoing process, not a one-off thing. If you create your budget and forget about it too soon, you don’t give it enough time to start working its magic. Reviewing it helps you uncover potential issues before they become more significant problems and helps you nip potential spending leaks in the bud.
Final thoughts
If you’re having trouble creating or sticking with a budget, you might be making one or more of the mistakes listed above. Setting your budget up accurately from the beginning is the best way to ensure success with budgeting and improve your overall financial situation.