6 Budgeting Mistakes You're Probably Making
Whether you're saving up for your dream yoga retreat or just hoping to buy a new houseplant, budgeting is key. A great way to calm financial anxiety, actively setting and sticking to a daily, weekly, or monthly budget will show you exactly where you stand financially at all times.
Yet, according to one 2016 report, only 32 percent of households in the U.S. have a steady budget they follow. To find out why this is, we reached out to three financial advisers and experts to learn about the most common budgeting barriers they see and how to work through them. Here are the highlights.
The 3 most common mistakes people make when SETTING a budget:
1. They don't consider every expense.
Keri Danielski, a consumer finance expert at Turbo and Mint, a digital budget tracker, stresses the fact that when you're making a budget, every little expense matters. No ongoing charge or subscription fee is too small to consider. "It's counterproductive to only account for some of these accounts when considering your holistic financial standing—as you won't be able to accurately spot trends in your spending or opportunities where you can be saving," she says.
Speaking of recurring payments, Danielski recommends taking advantage of autopay features whenever you can to avoid late fees. "Pro tip," she adds. "Many credit card companies allow you to pick when you want your autopay to take effect, which means that you can choose to pay your bills during the time of the month when you feel most financially secure."
2. They don't put the right percentage aside for fun stuff.
"A good rule of thumb to follow when budgeting your nonessential expenses is the 50/20/30 rule," says Danielski. That means 50 percent of your income should go to essentials like food and rent, 20 percent goes into savings, and the remaining 30 percent can be discretionary spending—i.e., that CBD massage or a new shade of nontoxic nail polish.
If your discretionary budget is too small, she says, you may become frustrated by how hard it is to maintain and be tempted to give up altogether. But if it's too big, you may not be saving as much as you could. Instead, play around with your budget until you find a sweet spot. "Your finances should feel as though they are complementing your lifestyle," she says. "[They shouldn't be] leaving you with zero room for fun, or on the contrast, zero opportunity to invest long term."
3. They're too intimidated to make one in the first place.
Before you make a budget, it's helpful to sift through all your bank statements and see how much you're really spending and where. For some, this feels like a daunting task. Instead of expecting to nail it in one day, Michelle McKinnon, CFP, a financial planner, recommends easing into it. Maybe you start by setting a budget for clothing one month, based on how much you usually spend shopping, and then moving on to groceries the next. Eventually, you'll get to a place where you can look at your spending holistically. "People are afraid of how much they spend, but it's time to face the music," McKinnon says. "I promise—it won't be that bad!"
The 3 most common mistakes people make when STICKING to a budget:
1. They have FOMO.
While there's nothing wrong with splurging on yourself from time to time, it can add up fast. A few nights out with friends here, an expensive dinner there, and before you know it your vacation budget is almost nonexistent. This may be part of the reason 37.8 percent of Mint users who set a monthly budget end up exceeding it—and 16.25 percent of them do so by more than 40 percent!
Danielski says that you can stay on track by reminding yourself of your financial goals whenever temptation hits: "Remind yourself of the overseas trip you have lined up that you've been stashing your money and PTO for, or your plans to finally be able to lease the car of your dreams. Being mindful of your long-term financial goals and giving alternatives to otherwise pricey hangouts with friends will help you to rein in spending while also avoiding FOMO."
2. They don't check in with their budget enough.
While thinking about finances may not seem like an obvious addition to your wind-down routine, making a habit of doing so every night can be helpful. "To get yourself in the habit, set a nightly alarm to add up all your expenses before you wind down from the day, while all your purchases are still fresh in your mind," Danielski recommends. "This small nightly routine will help you to really account for all your spending—giving you a true picture of how you're tracking against your budget."
3. They are too rigid.
Priya Malani, founding partner at Stash Wealth, a financial planning service for millennials, actually doesn't love the idea of holding yourself to the same budget month after month.
"Budgets are very rigid and life is, well...unpredictable. If you set a spending budget for the various categories of your life (dining out, shopping, etc.) and life throws you a curveball—say, a friend comes in from out of town unexpectedly—what do you? Tell them you can't go out to eat because you've already hit your dining-out budget for the month?! Definitely not," she says.
Instead, she recommends figuring out what you're saving up for first and working backward from there. "Set up an automation so that your savings gets pulled out of your checking account automatically each month or week. Whatever's left in your checking account is yours to blow—guilt-free," she says. No more asking yourself, 'Can I afford it?' If the money is in your account, you can."