One of the foundational personal finance lessons is to create a budget and abide by it to track inflows and outflows effectively. However, developing a budget is not entirely straightforward and there are certainly some mistakes made in the process, especially by novices. This article aims to highlight some of the most common mistakes and provides suggestions to mitigating them to advance towards a more prosperous, financially literate lifestyle.
1)Not Having a Budget
A famous proverb goes "Showing up is half the battle won". The same can be applied to budgeting as well. A lot of people do not even have a budget to begin with, which then leads to consistent overspending and low savings rates. Therefore, if you have already taken the steps to start developing a proper budget, you are already ahead of the curve!
When creating a budget, a terminology used in the information technology world applies pretty well. The notion of Garbage In, Garbage Out implies that if the input for a program is faulty, the output will be faulty too. In the same way, when creating a budget, conduct the appropriate research to figure out how much you spend on things and where you can reasonably cut down to ensure that your budget is as accurate as possible for later reference.
3)Not Tracking Expenses
Once the budget has been made, it is futile if you do not keep track of your receipts and expenses as they come. Where possible, it is advisable to spend through card (debit card if you have had credit card problems in the past) instead of cash to have an online record of your transactions. This can enable you to keep track of your progress and steadily achieve your financial goals over time.
4)Failing to Prepare for the Unexpected
It's life. Things happen. Sometimes, these things are unprecedented and out of your control. So if there is no space in the budget for these unforeseen expenses, it is going to be very tight sometimes that may back you into a corner for other expenses. Always leave some cushion for these expenses, so you do not fall behind on your savings objectives.
5)Not Updating It According to Realities
Over time, expenses in the budget may increase, decrease or be re-allocated amongst existing items. For example, a marriage where your partner is a stay-at-home parent can increase your outflows while inflows remain more or less the same. Similarly, if you move into an area with cheaper grocery stores and transport costs, you have potential to save higher. Your budget should reflect these on a dynamic basis even if they happen in the middle of the month or year.
6)Spending What You Don't Have
Warren Buffett once said, "Most people save after they are done spending. I spend after I'm done saving". When making a budget, it is important to match the timing of outflows to inflows as far as possible. Failure to do so may cause your expenses to spin out of control and give you a negative cash flow in some months.
Having a budget is all well and good until you don't follow it. The key to achieving your financial goals is being disciplined enough to resist the temptations of spontaneous, gratuitous spending that increase your outflow and leave your bank account poorer at the end of each month. Therefore, after making the budget, ensure that you know exactly how much you can spend on non-discretionary items (i.e. everything outside of food, rent and other unavoidable expenses) and stick to it religiously.
8)Small Adds Up to Big
The price of a $2 coffee in the morning may seem like a drop in the bucket on most days. And indeed, on a standalone basis, it is not much at all. But imagine that multiplied by 365 days of the year. That makes $730. Simple sacrifices like that can give you financial freedom on accelerated timelines. Even if you absolutely need your morning cup of coffee, consider buying a coffee machine to brew your own at home.
It is easy to forget items that you spend for on a monthly or quarterly basis, but not on a daily or weekly basis. Items such as a haircut or your occasional face lotion purchase do not happen regularly enough to be top of mind. However, if you miss them, they may impact your savings rate when they do happen. Therefore, make sure the preliminary research you do spans a month or two to cover all expenses.
10)Being Overly Stingy
Anything in excess is poison. While it is good to be disciplined, doing so over long periods of time gives rise to desires that often converts wants to needs in the mind and ultimately manifests in expensive splurges. It is therefore advisable to leave some money for the occasional night out or other such entertainment. Remember, having fun is not financially irresponsible. Having fun without budgeting for it is.
11)Not Shopping Around
A lot of times, people rely on the recommendations of friends and family to make purchasing decisions. "Jim from work uses XYZ Cable Operator and he loves it, so I should get that too". However, the sheep mentality is not always the most prudent when it comes to budgeting. Shop around on the market to see the deals available and match them with your needs. Each dollar counts and it is your money, so an hour of time spent today in searching for a solid deal can save you hundreds over the course of a year or more.
All of this said, it is important to remember that a budget is only as good as what you make of it. The budget is an essential tool that can be powerful in propelling you towards a better lifestyle, but at the end of the day, it needs to be underpinned by fiscal discipline on your end to truly make it work and unlock benefits for you.