Building wealth and achieving financial freedom stem from your ability to save money. Or better put, from spending less than you make. This holds true regardless of how much you earn. It’s not uncommon to hear about celebrities who earned millions of dollars, filing for bankruptcy later in life. You’ll also hear stories of couples earning modest incomes who go on to retire as millionaires.
The best way to ensure you’re saving regularly is through budgeting. Not only does it help you end the month with money left over, but it allows you to identify expenses you can cut to free up additional funds.
Put your budget to work for you by reviewing six common mistakes people make when budgeting - and learn how to avoid them.
1. Failing to Make It Official
In its basic form, a budget subtracts your expenses from your monthly income. Your goal is to end the month with extra money that you can put into savings. While there are many ways to create a budget, nothing is more important than making it official.
Too often, people will spend time making a budget, only for it to get lost in the shuffle. You want to create a budget that will remain front and center in your financial life. Whether you’re using a budgeting app or creating a spreadsheet on your computer, commit to it.
2. Using Inaccurate Numbers
When creating a budget, you want your financial figures to be as accurate as possible. Otherwise, you might forget about expenses that derail your plans. Once that happens, it’s common for people to avoid their budget because it’s so far off track.
Instead, use the following tips to ensure your budget is realistic from the beginning.
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Use Past Account Statements
A top budgeting mistake is estimating your expenses. While you probably have a good idea of what you spend money on monthly, it’s very easy for things to fall through the cracks. For example, commonly missed expenses include:
• Birthdays, holidays (Valentine’s Day, Mother’s / Father’s Day), anniversaries, vacations, and bills that are paid irregularly (for example, Homeowner’s Association Dues might be billed quarterly).
To overcome this mistake, review your account and credit card statements for several months. Initially, identify all your recurring expenses – then look for any outliers.
•Identify All Your Incomes
Again, your account statements can help you pinpoint all your sources of income. Reviewing your past paycheck stubs will also help you determine realistic figures. And don’t forget about special incomes, such as tax refunds or work bonuses you might earn.
• Don’t Get Too Strict
A common error people make is creating a budget that doesn’t provide any wiggle room. Unexpected expenses will come up, and you need to prepare for them. It could be an impromptu night out with friends, attending a birthday party for your child’s friend, or an outfit for a special event. Keep your budget realistic by ensuring you have some spending money set aside.
3. Forgetting to Track Expenses
Even little expenses add up quickly. To keep your budget active and workable, you must track where your money is going.
An easy way to accomplish this task is with a “daily money minute.” Every morning, sign into your accounts and log any new expenses (and incomes) into your budget. If you do this daily, it will become a habit in no time. And it keeps your mind focused on your spending patterns – helping you to reduce frivolous expenditures.
4. Not Balancing Your Budget Regularly
Balancing your budget is crucial for two reasons: it helps ensure your figures are accurate, and it allows you to learn from any financial hiccups that occurred during the month.
An excellent way to ensure you balance your budget monthly is to schedule it on your calendar. Make an appointment with yourself (or your spouse) for a specific date and time. You’ll be much more likely to follow through when you block out a particular time on your calendar.
5. Relying on Your Credit Cards
Unexpected expenses will pop up – that’s life. How you handle those expenses can drastically change your financial outlook. It’s common for people to use credit cards to cover unplanned costs – or even impromptu expenses like going out with friends.
However, higher credit card debt (and paying interest) means you must reconfigure your budget to pay back the sum. Or the debt will just keep growing – leading to more financial challenges.
Instead, see if you can adjust your budget and pull funds from one category to cover the unplanned expenses. For example, you might be able to reduce your grocery bill a bit to help offset dining out with friends.
6. Failing to Repay Yourself
Whenever you borrow money from yourself – use a credit card, pull from your savings, or take cash out of your emergency fund – you need to find a way to repay the debt.
If you transfer money from your savings to pay an unplanned medical bill, you should immediately develop a plan to repay the sum. To do so, find expenses you can trim in your budget to replenish the money or pay off the credit card balance.
Failing to do so will deplete the savings you’re building or lead to costly credit card balances. Remember, your budget is there to help you build wealth through saving money – it’s not a piggy bank to take from as needed.
We’re Here to Help!
Building the habit of saving money regularly is the cornerstone of generating wealth. And there’s no better way to do that than through budgeting.
If you want more budgeting tips, are interested in higher-yielding savings accounts, or want to learn how to reduce credit card debt, we’re ready to help. Please stop by the Credit Union or call 410-687-5240 to speak with a team member today.