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Budgeting is the foundation of a long-term wealth-building plan.
Today, just about anyone can build wealth. But if you don’t have a budget for your money, you can be financially broke even when you’re earning more than the average person.
Nearly 70% of lottery winners end up broke after three to five years and a third of them even go on to declare bankruptcy later on.
But what are the most common budgeting mistakes and how can you avoid them?
4 Common Mistakes New Budgeters Encounter
There are four common mistakes that people often make in the early months of budgeting.
1. Not Having A Budget At All
It’s hard for wealth to come by if you don’t know where your money goes once it reaches your bank account.
Small expenses like a quick run to a convenience store can be easily forgotten.
When they’re added up, they can become a big financial hole that you can’t climb out of, which could be both financially and mentally draining for you and your family for a long period of time.
So, save yourself from that kind of situation and start budgeting today.
2. Not Having An Emergency Fund
When you don’t have some extra cash prepared before a crisis, you might find yourself in more trouble than you can handle.
Little things such as a broken tire or a visit to the doctor’s office can put you in difficult situations if you don’t have the funds to cover those unexpected expenses.
If you can’t fix a broken tire, then you might not be able to get to work.
If you can’t go see a doctor when you’re sick, then a small sickness might keep you from earning a salary for a month (or even longer) than a few days.
You can save yourself from a lot of financial trouble when you include an emergency fund in your budget.
This is why you should begin building an emergency savings fund – even just a $2,000 short-term savings fund would be able to save you from tons of financial crises.
3. Forget About Semi-Regular Expenses
These are expenses that include birthdays, holidays, and annual premiums that many people tend to forget since these kinds of expenses don’t happen as often.
In 2017, Americans who borrowed over $1,000 to cover holiday costs, more than half of those were still repaying the holiday debt even three months later.
Debts like these can be a huge burden on your finances for a long time and they will require you to sacrifice many opportunities and experiences such as a nice home, a reliable car, and a family vacation.
Make sure you keep a list of all the semi-regular expenses and set aside some money every month beforehand so you dig yourself into a huge financial hole.
For example, you typically spend $55 on Thanksgiving dinner, $175 on Christmas presents, $250 on your birthday, and $1500 on a family vacation.
Then, you need to set aside $165 every month beforehand so you don’t end up with debts that you can’t handle.
4. Think You Can Live Without Fun
Thinking you can live without fun when you make a budget is like thinking you can begin exercising for three hours every day for a whole year – it’s impossible.
There will be times that you’ll be tempted and give in to seeing that movie, hanging out with your friends, or buying that extra scoop of ice cream.
So, instead of waiting for that incident to come and rely on your credit card, set aside a small portion of your income specifically for you to enjoy all the things you like.
For example, if you make $3,000 a month, you can choose to set aside 5% of your income, or $150, and designate it as your “fun money”.
This is the money you can spend on whatever you like, whether it’s getting new clothes or dining out at your favorite restaurant.
This way, not only are you financially stable and organized, but you can also enjoy the fruit of your work.
Common Budget Strategies To Help You Avoid Mistakes
There are tons of budgeting plans out there that you can try, but try to stick with one consistently once you find the plan that can budget more effectively for your money.
A zero-based budget is a financial plan in which every dollar you receive from your work matches every dollar that’s going out to individual expenses.
That means every dollar you have has a job that it’s responsible for, whether it’s paying for your rent, student loans, or credit cards.
Suppose you make $3,000 every month. This might be what your budget would look like with a zero-based plan. The total expenses come out to be exactly $3,000.
- Rent – $1,000
- Groceries – $375
- Insurance – $100
- Gas – $200
- Entertainment – $100
- Emergency funds – $300
- Student loan – $200
- Utilities such as gas, electric, water – $150
- Internet – $100
- Cell phone – $70
- Retirement – $250
- Vocation and travel – $155
When you have a zero-based budget, you can spend your money with less stress and guilt because each category has a predetermined amount that you can spend every month, or at least until the next paycheck.
But a zero-based budget might not be a friendly choice for a new budgeter.
You may have to do a lot of estimation in the early month of budgeting which can lead you to overestimate one thing and underestimate the other.
Plus, it won’t stop you from taking out your credit card on a shopping spree – you have to rely on your own discipline during those unexpected events.
Fortunately, we can solve the credit card issue with the next budget plan; It removes the use of credit cards so you can learn to discipline yourself more when it comes to spending.
Just like its name, an envelope budget involves the usage of envelopes.
You first establish your spending categories and set spending limits for those expenditures, then you match each one of the categories with one envelope, cash your paycheck, and put the allocated amount for each category into the respective envelope.
Essentially, it’s a zero-based budget but with cash only.
Let’s say you have a paycheck for $300. Then your budget may look like this.
- $150 in the rent budget envelope
- $75 in the grocery budget envelope
- $30 in utility budget envelope
- $15 in savings budget envelope
- $30 in investment budget envelope
This is particularly helpful for those who have overspending issues when it comes to credit cards.
Every month, you can only spend the amount of money inside the envelope.
This way, you won’t run into the problem of overspending because once the envelope is empty, you can’t spend from the specific category until the next paycheck replenishes the envelope.
If you have money left over in any of the envelopes at the end of the month, you can either keep the cash in that envelope for the next month’s spending, or you can remove it from the envelope and add it into your emergency funds.
The 75/15/10 Budget Plan
If you’re unsure about how much money you should assign for each category, you can use the 75/15/10 method to allocate your money.
- 75% of every dollar will go towards expenses like rent, groceries, and insurance.
- 15% of every dollar will go towards savings like your $2,000 emergency fund and a complete emergency fun equals six months of expenses
- 10% of every dollar will go towards investments like index funds and ETFs.
With this method, you need to make sure all your regular expenses don’t go over 75% of your take-home income so you can have the rest dedicated to your financial future.
There is one major benefit to using the 75/15/10 method – you’ll always have a portion of your income that will go towards your financial future.
If you find 75% of your income can not cover all the expenses besides savings and investment, then you need to take a hard look at everything you’re spending and evaluate the importance of each one.
If you’re not using it, cancel or remove it so you can use that money towards your savings or investments.
Investing is something you want to start as early as possible because the younger you are when you begin investing, the more wealth you can build over your lifetime.
Let’s say you decide to invest $360 every month into the stock market at the age of 20. Then by the time you retire, you’ll most likely amass millions of dollars even if you never make above-average earnings.
But if you decide to wait until you’re 40 to begin investing, you’d have to allocate $2,000 a month to have the same earnings.
Therefore, once you have a complete savings account, you should use that money towards your investments so more money can work sooner to generate more income.
If you’re single and don’t have a lot of responsibilities, we recommend you to use a similar, but much more aggressive method, 50/20/30.
- 50% of every dollar will go towards your expenses
- 20% of every dollar will go towards savings
- 30% of every dollar will go towards your investments.
This will not only help you save faster, but it will also help you invest more aggressively and generate more money.
In addition, the faster you can build up a complete savings fund, the more security you will have when things don’t go your way.
Use A Budget To Avoid Common Mistakes In Your Finances
Any financial plan begins with a budget for your money.
Knowing how much money you have and how to best allocate your money are the two best steps you can take to secure your financial future.
It doesn’t matter if you’re making a six-figure salary or living paycheck to paycheck, your financial future depends solely on how you budget your money today.
Every budget starts with knowing how much money you keep after taxes and deduction and ends with allocating your money into spending, savings, and investing.
Building an emergency savings account will protect you in times of crisis, while your investments will protect you against the rising cost of living due to inflation.
However, you should stop distributing a portion of your money into a savings account once you’ve set aside six months of living expenses and funnel that money into investments that make your money grow over time.
For the sake of your financial security, learn to budget your money today so you can take charge of your personal finances and head toward a promising financial future for you and your family.