5 Most Common Budgeting Mistakes
Running you finances on a budget can be as easy or as complicated as you want to make it. While there isn’t one “right way” to run a budget, there most certainly are some budgeting mistakes you could be making that are making your life that much harder. Budgeting isn’t super fun, so don’t make it any harder than it needs to be.
Common Budgeting Mistakes
There are a few recurring reasons as to why a person is not able to stick to their budget. The below list will dive into some of the most common budgeting mistakes.
1. Your Why Isn’t Strong Enough
Budgeting isn’t the most fun activity. It forces you to evaluate your spending habits, your partner’s spending habits, and sometimes have some pretty difficult conversations. Having a strong “why” (i.e., your reason for starting a budget in the first place) is critical to budgeting success.
If you find yourself not having a strong desire to enforce your budget, then you may need to revisit your why. Why did you start going down this budgeting road in the first place? Is it so you can become financially free? Or is it so you can build an emergency fund so you aren’t financially ruined if something unexpected happens? Is it so your family has a nest egg in the event something happens to you?
Or, did you start budgeting because you heard it was something you should be doing, so you decided to give it a whirl? If your why isn’t driving you day in and day out, then you likely need to pick a new why.
2. Your Budget Isn’t Realistic
If you have an extremely strong why, but you still can’t stick to your budget, then this is the second thing you need to look into. How did you come up with your budget? Did you grab some numbers out of thin air, or did you generate it based on your current incomes, expenses, and where you want to be? If you grabbed numbers out of nowhere, and said, “This seems about right,” then you need to go back to budget basics.
How much are you earning every month? What are you spending every month on needs? What are you spending every month on wants? If your monthly spending on need exceeds 50% of your monthly take-home pay, then you either need to downgrade your necessities, have been fast and loose in your categorization of a necessity (e.g., Your Netflix, Hulu, YouTube TV, Disney Plus, and HBO Max subscriptions are not necessities), or you have an earnings problem (i.e., Your current level of income doesn’t meet your basic needs for survival, so you need to increase your income by finding a better, higher paying job, or start some side hustles).
50-20-30 Rule
The very popular 50-20-30 rule says that:
- At most 50% of your after-tax earnings should go towards necessities (e.g., rent, minimum debt payments, groceries)
- At least 20% goes towards savings/investing/paying down debt (e.g., High-Yield Savings Account, After-Tax brokerage account, etc.)
- At most 30% goes towards your wants (e.g., Netflix, eating out, etc.)
How close are you to this benchmark? If you’re attempting to save more than 20% of your after-tax earnings, then that is a great goal, but just make sure it’s attainable and it isn’t coming at the cost of your happiness. Sure saving 99% of your take-home pay would be great, but that isn’t a realistic goal for the majority of people.
3. Your Partner Isn’t On Board
I’ll just go ahead and say it. You will never be able to stick to your budget and hit your financial goals if you and your partner are not aligned. If you are budgeting your butt off, but your partner is buying everything they see, then your relationship will suffer and you will not hit your financial goals.
Couples counseling is outside the scope of this post and my expertise, but I’ll tell you what my wife and I did to get on the same page. It is similar to what Ramit Sethi recommended to the couples that participated in his mediocre, far too many slow mo shots of Ramit walking down a sidewalk, Netflix series, How to Get Rich.
Keys to Running a Successful Budget with a Partmer
- Both partners need to familiarize themselves with personal finance best practices (e.g., establishing and following a budget, spending less than you make, having 3-12 months of an emergency fund, avoiding high-interest debt, investing in index funds on a regular basis, participating in your employer’s pre-tax retirement account offerings, etc.). It’s fine if one partner wants to take point on learning these things. However, that partner needs to be able to clearly communicate these best practices to their partner.
- Talk through your financial goals. Do you want to be filthy rich? Do you want to be comfortable? Do you want to not worry about making the next mortgage or rent payment? Identify what dollar figures are associated with these goals.
- Assess where you currently are, financially, and how far that might be from the goals you identified in Step #2.
- Have regular money dates where you all review the past week or month’s spending/saving/investing. Talk about things you did well, and things you could improve. It’s very important the conversations that occur during these dates don’t turn into finger-pointing or the blame game. If you find yourselves arguing over every small expense (e.g., Why did you buy a latte at Starbucks on Tuesday!?”), then maybe it’s time to start setting aside a small amount of money each person is able to spend guilt-free.
4. You Aren’t Planning for Unplanned Expenses
Unplanned expenses are expenses that you should have planned for but didn’t. With a little thought, you could have identified these as expenses that were likely to occur. Unplanned expenses can consist of things like birthday presents, anniversary dinners, and having a baby. They can even consist of big ticket items like a new brakes for your car, or a new furnace, water heater, air conditioner, or roof for your house.
If you have a 30 year old furnace, then you should know that it’s living on borrowed time and you will likely need to replace it in a maximum of 5 years. Start planning for the upcoming expense by setting money aside every month so you aren’t hit with a $13,000 bill that you can’t afford. This is the exact mistake I made, which I cover in My Middle Class Trap. My lack of planning for replacing my very old AC and furnace caused me to take on a $13,000 loan. If I had put any type of critical thought towards that looming cost, then I would have put money aside every month so we weren’t caught off guard.
You should never go into debt, empty your emergency savings, or bust your budget because you failed to plan for something that you could have reasonably expected to occur.
5. You Aren’t Saving for Unexpected Expenses
Unexpected expenses are expenses that you couldn’t have seen coming. Things like losing a job, health issues, or a tree falling on your house. Unexpected expenses are exactly why you build an emergency fund. Your emergency fund typically consists of anywhere from 3-12 months of living expenses, depending on your job’s security and your income reliability. The lower your job stability or income reliability, the larger your emergency fund should be.
You build an emergency fund to plan for unexpected expenses, so you don’t need to take on debt or bust your budget to cover them.
Conclusion
Are you guilty of making any of the above budgeting mistakes? If so, the good news is that they are extremely fixable. Nobody creates the “perfect” budget on their first attempt. Your budget is supposed to be a living, breathing thing that you continuously assess, modify, and improve. Maybe you aren’t making any of these mistakes, and if that’s the case – good for you!
However, don’t get complacent in your budgeting and think everything will always go according to plan. Always look for ways to increase your income, and decreases your expenses, so you can increase your saving, investing, and paying down of debt.
Always be on the lookout for these budgeting mistakes, because they can creep up on you when you least expect it. Are there any budgeting mistakes you have personally experienced that you believe you have made this list? If so, please leave it in the comments.