Avoid Common Budgeting Mistakes

Now that you’ve got a clear picture of your cost of living, you can figure out where you can cut back and 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:

Prioritize Areas to Cut Back
Families frequently lose sight of the big picture because they’re distracted by more urgent, compelling ways to spend their money. Is your spending in line with your financial goals and your family’s values? (See Create a Family Mission Statement) Don’t let things like lunches out or a salon pedicure habit get in the way of funding your child’s college education. Realize that when you cut back in certain areas, you will be able to apply your savings towards more important things such as paying off debt, building savings, or achieving your goals.

First, look at your fixed expenses — the expenses that stay the same each month. Some will be hard to cut back on (mortgage, auto loans, etc.), but other fixed expenses such as cable, gym fees, lawn services, etc. may be easier to trim. Which monthly memberships can be eliminated? Is your cable/phone/internet package the right one for you? Could you get by with a less expensive version? Can you drop your land-line altogether? Can you do-it-yourself?

Your variable expenses are often the easiest to cut back on. These are the categories that fluctuate each month such as groceries, clothing, gas, eating out, etc. Visit our Money Saving Tips forums for creative solutions to saving money in each of these categories.

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.

By now, your budget has practically created itself. To complete your budget, allocate the appropriate amount of money to each category based on the steps above, making sure the right column (expenses) doesn’t exceed the left column (income).

INCOME:
Wages
Overtime
Interest Income
Alimony
Rental Income
Other

EXPENSES:
Mortgage
Insurance
Utilities
Car Payments
Food
Transportation
Clothing
Savings Contributions
Childcare
Recreation and Entertainment
Medical and Dental
Home Maintenance
Vacations
Other

Once you devise your budget, you may find that you’re coming up short of income to cover your expenses. Assign priorities to each thing you’d like to accomplish so that you can make a clear decision about what is most important to you.

Come up with a System to Maintain
The best budgeting system is one that is easy for your family to follow, whether it’s the old-fashioned envelope system or something computer generated. Don’t try to force your family into a system they don’t understand or isn’t easy to use. The biggest key to your success is finding a system that works for you.

Software programs like Quicken help make budgeting easy for many families.  It offers great features that allow you to graph and chart progress; they can even connect with your online banking platforms and help improve your credit score.   Mint.com is another online tool that helps you with budgeting.  Plus, it’s free.

If you’re not computer-savvy, the envelope system still works for many families today. How it works: Grab an envelope for each category within in your budget. Inside, place the amount of cash that your budget allows each month. Once the cash is gone, you’re done spending.  Other members report using prepaid debit card for a modified envelope system.  They simply load the funds for the month onto the card, and when it’s gone they’re done spending.