Welcome to another installment of budgeting information on Macro Mondays! Today we are going to tackle some of the most common mistakes when it comes to budgeting, not necessarily in the process, but when it comes to sticking to the plan. Life happens of course, but how can we better manage budget issues when unanticipated events come up?
This is part seven of Investopedia's eight-part course on budgeting, next week will share the final installment before moving on to another fun topic. Be sure to check out Investopedia's site by CLICKING HERE.
Everyone makes financial mistakes from time to time – that's just part of life. Learning about common budgeting mistakes can reduce your odds of making them.
Mistake No. 1: Not Tracking Expenses
In the same way that it’s impossible to stick to a diet if you don’t know how much you’re eating, it's impossible to stick to your budget if you don't know where your money is going. You need to keep track of every single purchase, whether it's something small like a parking garage fee or something bigger like a new television. The best way to remember everything you buy is to update your budget each night before you go to bed while your daily purchases and bill payments are still fresh in your mind. You could also carry around a small notebook so you can jot down your purchases throughout the day as you make them or use a personal finance app that helps you track all your spending from both your checking account and your credit cards.
If you hate tracking, a simple, old-fashioned budgeting tool can help you stay on track: the cash envelope method. Take several envelopes, write the name of a budget category on the outside of each one, put the amount of cash you are allowed to spend per category each month in the corresponding envelope, then make sure you don’t run out of that cash before the month is over. A modern version of this system is the Mvelopes app, which uses digital envelopes. It connects to your bank account to help you track your income and your spending, lets you set a monthly budget for each of your expenses and helps you establish savings goals.
One of the ugly truths about budgeting is that when you keep track of your expenses, it’s painfully clear when you’ve gone off track. That’s the whole point, though, and every day is a fresh opportunity to make better decisions. Go ahead and write it down when you’ve gone over your budget. The negativity you feel will help prevent you from overspending more or doing it again. Just think of this step as damage control. Own up to your overspending and then move on. Don’t let denial or the “what the hell” effect throw you further off course.
Mistake No. 2: Buying on Impulse
If you buy a pack of gum in the checkout lane every time you go to the grocery store and you go to the grocery store twice a week, that seemingly inconsequential purchase is costing you $8 a month, or almost $100 a year. Add a few impulse buys at a few other stores and websites over the course of a month and no matter how inexpensive each purchase is individually, they add up. There’s nothing wrong with buying gum, but if you notice by reviewing your budget that you’re buying it at a rate of 52 packs a year, you can plan to buy your gum thoughtfully in bulk at a big box store when it’s on sale for a third of the price. Impulse buying is expensive. Writing down even those minor $1 purchases every time can help you spend more wisely in the long run.
Mistake No. 3: Becoming the Victim of Budget Busters
Sometimes you go out to do something or buy something, expecting it to cost a certain amount of money – an amount you've budgeted for but when you get home you've spent much more. How does this happen?
Perhaps you go out with friends on a Saturday night and you think you're just going to a bar, but once you get there, the group decides to go out to eat. You're already along for the ride, so it's easier to give in to the pressure to join in on the food rather than be the odd one out. In that same scenario, after you've had a couple of drinks, money may not seem like such a big deal and you may buy everyone a round against your better, sober judgment.
These things happen, and you won't always be emotionally strong enough to prevent them. However, if you know that you have a tendency to buy more than just one thing when you go to the store – or if you know that your friends have a tendency to change their plans at the last minute – either avoid these activities or create a bigger budget for them ahead of time. You can also do damage control after the fact by returning excess purchases or redesigning your budget for the next couple of weeks to make up for your overspending.
Mistake No. 4: Being So Frugal It Makes You Miserable
Here’s another way that budgeting is like dieting: If you try to deprive yourself too much, you’ll binge later and throw all your hard work out the window. A spending binge can set you back far more than treating yourself occasionally, so go for the occasional minor splurge. Buy that bottle of wine or those flowers for your yard. Download an audiobook (but check the library first!). Buy a latte. Order a pizza. Just keep your treats within your spending limits and you’ll be fine.
This may mean you’re saving $200 a month instead of $300, but it’s better than saving $300 a month for six months, making yourself miserable in the process, then going out and blowing $2,500 in the seventh month.
Mistake No. 5: Trying to Do Everything as Inexpensively as Possible
Sometimes the cheapest way isn't the best way. If milk, bread and eggs are cheaper at one grocery store – and chicken, butter and cereal are cheaper at another – you shouldn't go to both stores every week to get the best possible deal on each and every item. Doing so costs gas money and time, and unless you have incredible self-control, you'll probably be tempted to buy something at the second store that wasn't on your list, thus defeating your whole purpose.
Grocery stores use inexpensive loss-leaders to get you in the store and tempt you to buy things you hadn’t planned on. A better idea is to visit each store in alternating weeks and buy two weeks’ worth of each store’s best deals. And you’re probably heard the expression “penny wise but pound foolish.” Yes, you can save $600 this month by skipping your car manufacturer’s recommended timing-belt replacement, but next month you might find yourself getting stranded and spending much more due to a damaged engine if the belt breaks.
Think about your spending not only in terms of money but also in terms of time, aggravation and sanity. When you have limited time, determine where your money-saving efforts are best spent. For example, should you focus on clipping coupons to save 30 cents at the grocery store, or would you come out further ahead by using that time to switch over to a checking account that doesn’t charge a monthly maintenance fee and a low balance fee?
Mistake No. 6: Not Asking for Help
If you need help staying on track, ask someone to hold you accountable. This could be a friend, relative, significant other, spouse, financial coach or financial advisor. You could also join an online or real-life budgeting class or club where members hold each other accountable for their spending and a group leader requires monthly check-ins and offers personalized advice.
Pick someone with whom you feel comfortable discussing money. You don’t necessarily have to share the intimate details of how much you spend and make, but you should be willing to speak honestly with this person about what your goals are, which steps you are taking to achieve them and whether you are staying on track. It’s important to pick someone who won’t be judgmental if you slip up or set a goal they don’t necessarily agree with, and who won’t lie and tell you a major mistake is no big deal. The person you want will be truthful and will support you and encourage you. Learning about other people’s successes can also give you ideas for improving your own habits, while learning about other people’s failures can help prevent you from making the same mistakes.
For some people, an independent professional, such as a financial advisor or financial coach, may be the best bet for keeping spending in line. You may think you can’t afford their help, but if you’re routinely spending $300 a month on items you don’t need and being held accountable by a professional only costs you $100 a month, you’ll come out ahead. You’ll also probably get extra advice and money management help that will improve your overall financial picture in ways you didn’t expect. Highly qualified financial advisors who charge by the hour and work with folks who aren’t rich do exist; you can even work with someone outside your area via phone or online chat.
If you can’t afford a financial advisor but seek the neutrality and confidentiality of a third party, you may be able to find a local government agency or nonprofit organization that offers credit counseling, debt management or money management assistance. Though you may have to provide documentation proving that you qualify for their assistance, services designed to help low-income or deeply indebted individuals will most likely be free; beware of those wanting to charge you for help.
Everyone will go off budget occasionally no matter how much money is available to them. It’s human nature to be imperfect. Accept it as a certainty that going off budget will happen. While that’s not an excuse for making poor choices, the best way to correct your mistakes is not to beat yourself up for them. Take what actions you can to correct the mistake — maybe you can return something you purchased (stores often have surprisingly liberal return policies), or make up for the extra spending by selling something you own on eBay, Amazon or Craigslist. Maybe there’s nothing you can do except vow to do better next time. Then, forgive yourself and start fresh.
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