Budgeting is not about depriving yourself of things you want. When done correctly, a budget serves as a blueprint for our financial future. In fact, a detailed, written budget is actually a vital part of a healthy financial plan.
Unfortunately, false perceptions about budgeting cause many well-intentioned people to make mistakes or give up on the idea of a spending plan altogether. We are here to help put an end to budgeting blunders, once and for all. Here are the most common budgeting mistakes you should avoid.
- Not having a budget at all
Making a budget involves tedious work. For many, it is a scary experience they would rather avoid. You may want to avoid it but making a budget and some financial adjustments is much less painful than being in crippling debt. It hurts, but being broke hurts much more. Part of the problem is that budgeting has traditionally meant sacrificing things you love and embracing a pauper’s lifestyle.
- Forgetting About Income Tax
Pretend you have a salary of $50,000; That does not mean you take home a twelfth of that each month. Income taxes take a cut before you ever touch that money. If you calculate your max spending using your salary then you are pretending you have several thousand dollars that you do not have. In this instance, you would be over-estimating your take-home pay by around $12,000.
- Not Having An Emergency Fund
Emergencies and the resulting surprise expenses are an unavoidable part of life. The only way to prepare for the unknown is to acknowledge that things happen and to build up a financial cushion. Consider the cost of the following emergencies:
- Auto Repair: The most common auto repair is to replace the oxygen sensor. This typically costs $250.00
- Home Repair: The most common home repair is a clogged or leaky sink and the average plumbing bill is between $160 and $430.
- Health concerns: The typical cost for a medical visit for an illness ranges between $130 and $180.
Hopefully, you will not experience any of these scenarios soon, but it would be unrealistic to think that they will never come up. The general recommendation for an emergency fund is that it is large enough to cover three to six months of your total living expenses.
Coming up with that amount all at once is hard, so set up a monthly contribution. Any month you do not need to use it will be an addition to that fund.
- Failing to Negotiate
Before you cancel your cable service or skip out on a coffee, try negotiating down your bills or shopping around for a better deal.
Are there any loans you can refinance? Banks and credit unions are always competing on rates and if you made a big purchase (like a car or a home) when your credit was not so good, then you should shop around for a new rate.
Have you ever signed up for a service at an introductory rate and then a year later the price jumps? Companies spend a lot of money trying to attract new customers and if you threaten to leave for another provider they will usually be willing to try and negotiate a deal or put you back into that introductory offer. You can do this yourself or you can sign up for an app to do it for you.