Step #23: Avoid Budgeting Mistakes

Now that you’ve got a clear picture what you spend, what you earn, and where you can cut back you can create your budget. When creating a budget, a lot of families make critical mistakes. Don’t set yourself up for failure! Here are some tips to ensure your success:

Pay Yourself First
Despite record amounts of disposable income Americans had a negative savings rate in 2005-2006 for the first time since the great depression. Making saving automatic can help you beat the statistics and set aside more of your income for the future. If your employer offers an automatic deposit plan, allocate some of your earnings to go directly into a savings account. If you don’t see it, chances are you won’t miss it. If you don’t pay yourself first, you’re increasing the likelihood that you’ll use that money on other categories.

Build in Wiggle Room
If you’re inflexible when devising your budget, you’re setting yourself up for failure. Allow for a financial cushion in each category so when fluctuations occur you’ll be covered.

Budget for Emergencies/Irregular Expenses
Emergencies happen. Cars break down. Kids get sick. People lose jobs. Those are simple facts of life. It’s not a matter of IF they happen -- it’s more of a WHEN. Don’t act like a victim when life happens to you, but instead be prepared. Add a rainy day fund to you budget. If you don’t have one at all, it may help to start out with a goal of having $1,000 set aside. Then, as you build your fund and pay off debt, increase that goal to having three months’ of living expenses set aside. When you’re completely debt free and building up retirement savings as well, increase that goal to six months.

Budget for Irregular Expenses
Even though things like vacations, insurance payments and buying holiday gifts don’t happen every month, include them in your budget as well. Estimate your total yearly expenditure and divide by 12 to come up with your monthly budget.

Build in “Fun Money”
Some of the most successful budgets have a category for “fun money” – money that doesn’t have to be accounted for. It could be cash for sodas/snacks, lunches out, or whatever you want. This category can help prevent you from feeling “trapped” in your budget and having to account for every little expense. How much is in this category is really up to you and should fit your financial situation.

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These are great comments. The wiggle room and fun money categories are missed out of most budget advice I see and IMHO these are the most important because they make success easier. It would be like going on a diet with no treats, ever, and never being able to go off a plan. It's no fun. But wiggle room and fun money make it fun and make it yours.

My problem. Because our income is variable and because we pay ourselves first, some months there is wiggle room / fun money and other months there isn't. We try and save up some extra for fun things but it tends to get used on needs during low months. I wonder if I should set up yet another ING account for fun money?

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Mom to dd (age 9) and ds (age 11)
blogging daily about purpose and personal identity

I totally agree with all of these suggestions, especially the wiggle room. I would say 10 out of 12 months out of the year, I end up spending an average of $200 more than I had planned or budgeted for - in the winter months we have more copays for dr. visits and prescriptions, in the spring and fall we have sports sign up fees, in the summer we have camp costs, etc. - there are ALWAYS things that come up that I forget about.

Yes Great Suggestions for a budget. We started Paying ourselves and it has been nice to see our 401K growing even if its the only thing. Plus the 401K profit share and matching that DHs company offers are great programs to take advantage of.

I wish we had more emergency money we have had to use credit to get us through some tight spots and are still trying to pay off the debt.

I love the idea of fun money and wiggle room even with a really tight budget we go out as a family once a week.

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Kimberly Proud Mommy to Bethany Rose April 2006 &

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that is what I am confused about ~ the suggestion is to have a little bit of emergency money, but for some reason I am having a hard time setting some aside & keeping it there when I have cc debt. especially when a have a couple little ones that even $1k pays off? Suggestions??

Depending on the amount of credit card debt you have and the interest rates, it could very well make more sense for you to apply any extra money towards that. However, as you pay it down and get it under control consider setting some aside for an emergency fund. Use the $1,000 as a guideline.

I will be adding more tips for those who are in debt later on, but the main point here is to include emergencies and irregular expenses in your cost of living. Most people don't budget for them and then they get angry and resentful when their car breaks down because they don't have the money to cover it. Expect that these things will happen, because they do. If you're prepared for it, you're empowering yourself.

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Dave Ramsey recommends having what he calls "Blow" money. This is money purposely set aside for blowing but it is a reasonable amount.

Having an "emergency fund" keeps you from having to use your CCs again when an emergency comes up.