Introduction
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According to a 2020 Intuit survey, 3 out of 5 Americans and in general 65% of people, do not follow through on budgets or even have a budget to start with.
This simple process of tracking money in, money out, has been made to leave you in a cold sweat; something you put aside to handle “another day”.
Do you know why? It’s because we all start out with good intentions, but may be approaching it too aggressively. So here are a few key things to avoid to not fail at your next budget.
1. Not Tracking Income and Expenses
Not keeping a record of your income and expenses Creating a budget and sticking to one are quite different. Your budget doesn’t make much impact if you don’t watch, assess, and make adjustments.
One way to follow through with your budget to maximize its potential is by tracking the money that comes in and goes out. When you fail to monitor your income and expenditure, you can easily spend money on unnecessary things that can make your budget ineffective.
To avoid this, try to note each money you spent on day to day basis. And at a specific time, either weekly or monthly, compare your expenses with your budget, to ensure that you are still on track.
In this way you can easily see the misuse of your expenses and can return to the track as soon as possible.This single habit of tracking is the most important part of being honest about where and how you spend your money.
- As it also tells you when to stop spending and when to pay attention to your income.
2. Budgeting Without Specific Numbers
Budgeting without specific numbers When you don’t take the time to find out exactly how much you earn and how much you need to spend on each item on your expenses list you tend to have uncertainty in estimations and calculations which most times lead to errors in your budget.
When you do guesswork on your budget, it’s easy for you to either overestimate or underestimate how much you have to allocate in your budget, which can lead you to problems in times when you have to execute.
Also, when you don’t know exactly what your income is, you can easily overshoot to create a budget with a non-existing amount that can land you in debt.
You should know the exact total amount of money available for your budget, across all of your potential income streams. Ensure that this is money after taxes, and make sure this money will be available at the time you need it.
Always get your facts and figures as close to right as you possibly can before you even start budgeting. You should have a detailed list of your expected expenses so that you can have a more concrete idea of how much you’ll need for spending.
3. Using Gross Income Instead of Net Income
Using gross income instead of Net income The total money you earn from your employers or clients before taxes and other deductions is referred to as your gross income.
You should note that, until the taxes and other deductions are made, the amount you have is not your exact income. On the contrary, net income is your income after taxes and deductions are removed.
One very frequent budgeting misstep that is made is using your gross income to determine what you can afford. The problem is your gross income is not just your money.
- You still have to pay the government, and other deductions like your healthcare costs, and 401(K) retirement savings. Instead, use your net income when budgeting.
As this gives you a complete idea of how much and what you can afford. It also gives you a realistic budget by creating a spending plan based on your exact take-home pay.
4. Forgetting to Factor In Inflation
Forgetting to factor in inflation With the rapid rise in inflation pumping up housing costs, gas prices smashing to the highest in recent times, and virtually all other expenses rocketing up, it’s easy for you to underestimate how much money you need to set aside for every given category in your budget.
This is why it’s always a good idea to reassess your numbers every couple of months as you’ll most likely see a natural increase in the items you tend to buy week to week or month to month.
- With the increase in the cost of many of life’s essentials, you should try to leave a little cushion when calculating your numbers.
5. Not Separating Needs vs. Wants
Needs Vs Wants It’s important that when you are initially creating your list of expenses that you categorize your spending as either a need or a want.
This step can be challenging as it requires total honesty of yourself. When you’ve become accustomed to your life, you may find it difficult to truly realize that something you had originally listed as a need, is really just a want and you could potentially live without it.
But taking the time to create these categories will help you separate your expenses into what is necessary for your life and well-being (needs) and what you will like to have but can live without for a while (wants). This is not to say, wants are bad, they’re not. But if you are pursuing goals that require a short term change in priorities, then these items should be the first things to be removed.
Bonus Mistake: Not Budgeting For Savings, Investments, and Emergencies
Only tracking income and expenses should also have line items in your budget that track your savings, investment and emergency funds.
Your budget can already be tight, and you think you really have no extra money, but this is an important step. To deal with this, you must first keep yourself.
Setting up automatic systems to move the money immediately to their appropriate accounts can help you reach your goals faster and more consistently.
The Ultimate Mistake: Not Having A Goal Or Plan
Not having a goal or plan Sticking to your budget is great but making massive strides toward your goal is even better. Whether your goal is to pay off debt, build an emergency fund, set aside money for retirement, or save for college, you’re more likely to achieve these goals if you have them budgeted.
- Without having your budget goals, discipline to stick to your budget becomes very difficult. You will have little or no motivation to achieve anything worthwhile.
You have to know where you’re going and having a budget goal helps you figure that out.Flowing aiming through life through life, and throwing your money on every beautiful shiny thing that catches your eye, this is not a way of financially stable future.
The budget with goals forces you to map the plans, track your progress and help your dreams to make reality.The biggest budgeting mistake you make can, is not having a budget at all! We all need a budget.
Budgets shed light on your current financial picture and gives you the confidence you need to move forward to the next financial endeavor you want to make.
