5 Common Budgeting Mistakes

That Make It Seem Hard to Get Ahead

If you or someone you know has ever found it challenging to start or consistently stick to a budget, then you’ll find this article useful. Today, we break down 5 common budgeting mistakes that make budgeting seem more difficult than it is. We also suggest solutions to help with resolving or minimising each of these mistakes.

Guessing at Monthly Costs

The first of our 5 budgeting mistakes is the approach of guessing at monthly costs when first planning your budget. Sure, you can tally up the expenses you usually incur in your head. But it is very likely that what you think you’re spending money on does not tell the full story. After all, if it was that simple you wouldn’t be looking for help in the form of a budget in the first place!

Solution: Print out between 3 and 6 months of your bank /credit card statements. Then go back through them keeping tallies of where exactly your money has gone. I remember the first time I did this; I realized it was not the coffees I bought that were sapping my money away without me knowing but the silent expenses such as my transport costs to and from work.

You may discover some very interesting and helpful patterns about your spending by actually looking at what has happened. With this knowledge in mind, it is easy to build a reasonable budget based on realistic historical trends so that your first month trying to do better financially doesn’t seem like an unreachable set of expectations.

No Emergency Fund

The second mistake on our list is not having, or allowing yourself to build, an emergency fund. An emergency fund, as the name implies, is an amount of money you keep stashed away for particularly rainy days. This is not to be confused with your savings. It is money you should keep in either cash or a very stable and liquid asset that can easily be used to cover a sudden expense that might otherwise see you dip into debt to cover. Something like a major health expense or an expensive sudden repair on your car. By the way, no, a scheduled service doesn’t count (as you should already be planning for that!) are where this may come in.

The reason this is so important is it gives you both peace of mind knowing if anything unexpected arises, you’ll be able to handle it without needing to use a credit card, personal loan, or bug friends or family.

It is also important as it can protect you if you lose your job or are injured and can’t earn your normal income for some time. Keeping 3-6 months of expenses in your emergency fund allows you to still work on improving your financial position without having to fire sale assets in times of struggle.

Solution: Specify a certain portion of your income that will go towards building up your emergency fund every pay cycle. Have this amount automatically pulled out as soon as the money hits your account. Then you know it is taken care of and won’t be forgotten about or spent. Depending on your industry, risk tolerance and lifestyle you will want to determine what your emergency fund goal is.

If you’re a student who lives at home, you may be comfortable with 3 months of expenses saved up. If you own 2 investment properties and work in a sales or similarly commission-based role, I suggest keeping 6-12 months of expenses stashed away to give yourself complete peace of mind. This is ultimately a personal choice but no one can deny it is empowering to have an emergency fund ready or at least in progress.

No Fun Money

The third common budgeting mistake is not factoring fun money into your budget. Often when people finally get motivated enough to take control of their finances, they do it in a cold turkey approach. You suddenly see the potential and want to realise it all at once. The issue with this is you will find after a while you lose motivation by not allowing yourself to let your hair down occasionally. Or if you do and it wasn’t budgeted for, you have now “ruined” your efforts which justifies forgetting about the budget entirely. This is a common reason people fail at budgeting and it really is a simple thing to rectify.

Solution: Each pay cycle, allocate some money for fun. Depending on the lifestyle you want to live, your income level and your financial goals. This will determine how much is reasonable in this regard, and you can always adjust it later. Keep in mind, just because you have allowed $X to be spent on fun this month, does not mean you have to spend it all right now. If you allow it to build up over say 2 or 3 months to allow yourself to buy bigger ticket items or experiences if you prefer, that is fine too. This method also reinforces the critical skills required to avoid instant gratification.

Not Reviewing Projected vs Actual Spending Over Time

Mistake number four is an easy one to make. You have your budget, you’re being a bit thriftier and you feel like you’re making good progress. Maybe you are, and that is excellent of you. Remember though, that even the nicest of cars still need to be serviced. How can you identify any lurking issues, quantify successes or failures, and most importantly evolve and refine your budgeting skills over time if you don’t periodically compare what you have been spending against what you’re budgeting for?

Solution: In a similar fashion to mistake number 1, you can print out your bank/credit card statements again and compare them against your budget. If you find you are significantly over or under spending in any areas – that’s good. At least now you know, and can ask the questions like: Was it unreasonable to think I could spend so little on this? Why did I allow so much for that if I am pretty comfortable to go without it? Now that you’re asking the right questions your budget can mature over time and become a well-oiled financially positive machine. That is how you get on the financial fast lane!

Not Focusing on Big Ticket Expenses

The fifth and final mistake on our budgeting mistakes list is not focusing on the big ticket expenses. Too often will you read or watch someone giving budgeting advice that will tell you to avoid buying that coffee every morning. Or stop eating out in order to get ahead financially.

Whilst these can be good suggestions. if you’re like me and already keep those things fairly locked down while still allowing yourself to live a life worth continuing, you might roll your eyes at it. I found when I experienced a lot of the mistakes listed in this article that it was the big ticket items costing me more each month. I took these as givens while scrutinising myself for having a $4 coffee before a long day at work. Later I realized expenses like car insurance could be brought down more than enough to cover my coffee budget. With enough left over to have a positive result each month.

Solution: Rather than nickel-and-diming yourself, while assessing your monthly spending habits leave no stone unturned even if you think it is locked in. Look at your mortgage rates, health insurance, and car insurance, internet and phone bills for example. You may find by just asking, or switching providers can save you tens, hundreds or even thousands per month. When you succeed at this, it makes sweating the small stuff look a bit unnecessary and lets you feel like you aren’t depriving yourself on every level.

Thanks for reading! I hope you’ve found something useful to try that can help you with achieving your financial goals. Please share this post with any friends or family you think could use a hand as well to get them in the financial fast lane!

Now ask yourself why you want to build wealth to ensure you can stick to it!

Alex O'Donnell

I'm a 20-something IT professional by day with a strong passion for finance, investing, cars, motorbikes and music. Living in Sydney, Australia.

This Post Has 3 Comments

  1. Avatar
    Ashleigh

    Very helpful points!! 😃👍🏼

  2. Avatar
    Justin

    Long time supporter, and thought I’d drop a comment.

    Your wordpress site is very sleek – hope you don’t mind me asking what theme you’re using?

    (and don’t mind if I steal it? :P)

    I just launched my site –also built in wordpress like
    yours– but the theme slows (!) the site down quite a bit.

    In case you have a minute, you can find it by searching for “royal cbd” on Google (would appreciate any feedback) – it’s still in the works.

    Keep up the good work– and hope you all take care of yourself
    during the coronavirus scare!

    1. Avatar
      Alex O'Donnell

      Hi Justin!

      Thank you, I really appreciate the comment! My theme is called “OceanWP”, go right ahead! I have looked at your site and it looks very nice as well.

      We’re certainly going through some strange times right now being confined at home, but trying to take advantage now to produce some more content with the extra time I have available!

      Cheers 🙂

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