You may think that we talk about budgets a lot in financial planning and you would be right! But why do financial planners focus on the importance of budgets? Well, budgets are the benchmark for the organization of your financial life. They help you visualize where your money is going by tracking expenses and setting a plan for future contributions.
But budgets seem to get a bad reputation as annoying and restrictive. I think the reason these adjectives have clung to budgets is that people don’t really understand how to make them and use them to their individual advantage.
I am ready to change that perception by discussing the top 4 budgeting mistakes I see and how to fix them to make your budget work for you.
1. Not Having A Budget
It shouldn’t come as a surprise that many Americans today don’t have a household budget. Sometimes people think that they don’t need one or that they can manage fine without one. But this mentality often leads to overspending which only becomes apparent when the credit card bills come in the mail.
But why does this happen?
When you don’t have a budget, you are less likely to be aware of your spending and saving practices. By creating a budget, you will have a built-in way to track those expenses to give you a visual of where your money is going each month. It is important to track both your spending and your saving to ensure that you are both paying your bills on time and saving for your financial goals.
So often budgets are talked about in terms of spending (or not spending) money. And while that is certainly a piece of it, saving habits are another important part about budgeting like, for example building in retirement savings into your monthly budget.
2. Forgetting About The Small Things
The most recent data from the U.S Bureau of Labor Statistics found that the average American household spends $3,000 per year dining out. If that number surprises you and you’re thinking no way is that true, let’s take a closer look.
Let’s say that you spend $10 each time you eat out whether that be lunch, dinner, take-out, etc, which in the grand scheme of things is a pretty good deal, and if you eat out 4-5 days per week, each workday perhaps, that puts you at about $50 per week or $2,600 per year. This is just an example to show you that seemingly small expenses do add up and can impact your budget.
Walk through your morning or afternoon routine. Do you stop on the way to work to pick up a coffee? Do you swing by your favorite sandwich shop for your 12 o’clock usual?
These small expenses do have a large impact on your overall budget. Just because these things do have an impact doesn’t mean you have to cut them out of your life or really sweat if you decide to get lunch with your coworkers. If you are craving a fresh coffee don’t deprive yourself of it, simply be aware of the amount you are spending and pinpoint target areas to pair down.
3. Not Planning For Emergencies
Too often, I see a lot of young professionals put an emergency fund on the back burner. They are young, healthy, and may not feel that they need a fund for emergencies but emergencies happen to people at all ages and can come in many forms.
Building emergency savings into your budget will help you prepare for any unexpected events like the sudden loss of a job, a costly medical event, or caring for a parent or relative. It is important to have 3-6 months of living expenses in your emergency fund, so consult your monthly spending to determine what those costs look like.
4. Leaving Yourself Out of It
Spending is personal and should reflect your values. You don’t have to make your budget look like your friends, coworkers, parents, etc. It is important to make your budget reflect the things you care most about. Because when you do that you will want to stick with it.
One of the great things about a budget is that it helps you put your money toward your values and goals, the things that matter most to you. Here are some questions to help guide you.
- What are your core values?
- How can your budget help enhance those values?
- Where can you spend and save more intentionally to help personalize your budget?
When you approach creating a budget from this angle, you won’t see it as restrictive, rather freeing.
I love working with professionals to help them create the best budget that authentically represents their lifestyle and the things that mean the most to them. Are you ready to make a budget you will actually like and stick with? Give me a call.