Creating a budget and tracking spending is one of the cornerstones of good personal finance, and yet many people do not know how to do either of these. Even for people who attempt to do this, there are a few common errors that keep them from succeeding. Budgeting is an important skill and while the initial parts of setting up a budget can seem complicated, people who are thorough about the process will quickly come to find that following a budget is not difficult and can offer peace of mind and financial freedom.
Forgetting Small Expenditures & Variable Expenses
Forgetting about little items such as coffee a few times per week or making a grocery budget without allowing for cleaning supplies, shampoo and other incidentals is one of the most common errors people make in budgeting. While these expenditures might be small taken singly, they can add up quickly, and people who fail to include them may find their budgets off balance without understanding why. Birthdays, holidays, vacations and changes in cooling or heating bills based on time of year are all expenses that may vary or only come around occasionally. One good way to budget for them is to average out these costs over a year and build a monthly amount into the budget to cover them.
No Emergency Savings
No matter how good a budget is, it can be completely knocked out by the need to suddenly have to pay for a major car repair, take a sudden trip because of a family emergency or make an unexpected vet visit. Conventional wisdom says three to six months of income is a good amount to have in a liquid emergency fund.
Making Assumptions About Spending
When creating a budget, it is best to spend a month or two tracking expenses first in order to get an accurate idea about what things cost. Estimates of spending are often far from reality. Since tracking is also important as part of maintaining a budget, this is a good habit to start.
Not Shopping for Better Bargains
Sitting down to make a budget is also a good time to review cell phone plans, subscriptions, insurance and other items to make sure that they are still a good deal. For example, a person can compare auto and other types of insurance online and may find a much cheaper policy. With some companies, there may be a discount for buying both home and auto insurance.
Choosing the Wrong Method or Making it Too Strict
The best method of sticking to a budget is choosing one a person will actually practice in the first place. Some people take out a certain amount of spending money each week and place it in an envelope. When the money is gone, they know they have no more spending money. Others prefer putting every purchase on a card to make tracking expenses easier. The method chosen is not nearly as important as how well it works for the individual. Just as diets fail when they are too rigid, it is important to make room in a budget for treats. Whether it’s expenses for eating out, going to movies, buying hobby equipment or something else, fun should be accounted for.