When it comes to financial management, there’s no greater tool than a well-designed budget. While the idea of living to a budget can often be seen as restrictive, the opposite is actually true: a good budget allows you to live life with a minimum of financial stress, safe in the knowledge that all of your family’s expenses will always be met.
However, the key to enjoying the benefits of living within a budget is to ensure that your budget is as well-designed as possible – which, given the amount of misinformation that often surrounds the subject of budgeting, is not quite as simple as it initially sounds. Below, we have highlighted four common budgeting mistakes and, most crucially of all, how they can be fixed.
1) Not including savings in a budget
The most conventional method of arranging a budget is to review your income and your regular monthly outgoings, and then calculate how much you have available to spend on entertainment, groceries, and so on after all your bills are met. While this method can work well, it can lead to a very important factor being overlooked: savings.
As you are no doubt aware, savings are an incredibly important part of your overall financial picture. It’s therefore worth including your savings as a section within your budget, similar to how you would include a standard bill, and then review the tips from Cash Flex to make sure you’re making the most of the funds you are able to set aside every month.
2) Using the same budget for multiple months
Many of the expenses people incur tend to be repeated each month; the same phone plan, the same rent or mortgage, and so on and so forth. As a result, it’s often tempting to simply duplicate the same budget from one month to the next.
However, expenses tend to change throughout the year; for example, you will likely spend more on gifts around Christmas, so your budget in November and December needs to be altered to account for this, and buying back-to-school supplies means your budget will also need to be altered in August. As a result, always start afresh when you plan your budget for each month; duplicate the regular outgoings, but then make adjustments to cover calendar-specific expenses.
3) Being too strict
Budgeting allows people to assert control over their finances, but this can sometimes go too far. Sometimes, people choose to make budgets incredibly strict, with very little non-essential spending allowed. However, while doing this can be useful if you’re trying to set money aside for a particular purpose or need, keeping your budget strict for no overarching reason can feel incredibly restrictive.
The goal of any budget is to find amounts that you can realistically stick to over the course of the month; a fact that remains true even if you are trying to cut costs or save for a larger purchase. If a budget is too strict, then it becomes all-too-easy to break. It is, therefore, preferable to set a realistic budget, including a few treats where appropriate, that can actually be adhered to rather than cutting non-essentials completely.
4) Not including a contingency
Even the most meticulously-planned budgets will, on occasion, run into difficulties – there are a number of financial surprises that can occur during any month, and covering these can mean that the rest of the budget is seriously depleted. When this happens, staying within a budget becomes next-to-impossible.
The most common solution to the above is to try to build an emergency fund, and this can work well. However, there are some scenarios which don’t quite meet the “emergency” threshold but you will still want to be able to afford – for example, if one of your children is invited on an impromptu day out with friends. As a result, building a contingency into your budget – in addition to working to build your emergency fund – can help to cover costs that aren’t quite emergencies, but aren’t easy to budget in advance for either. If you get to the end of the month and the contingency hasn’t been used, then you can simply add it to your savings or save it as the next month’s contingency instead.
Budgeting is not something that comes naturally to anyone, so it’s entirely natural to make a few mistakes along the way. By identifying these mistakes, and rectifying them as necessary, you can smooth your budgeting experience and look forward to the freedom and peace of mind a great budget can afford you in future.
*This is a collaborative post. For further information please refer to my disclosure page.
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