5 Mistakes People Make When Doing Their Budgets
I’m sure by now all of you are using a written, zero-based budget for your household expenses, right? So this list is probably just another instance of me preaching to the choir. But just in case you haven’t quite gotten the hang of the zero-based budget yet, or in case you’ve run into a few problems implementing it, here are a few ideas about things that you might want to consider when adjusting your household budget from month-to-month, or in the case of changes to income and/or expenses. I think of the budget as something that is written down, but that is still malleable from month-to-month, because things that need to be spent tend to change from month-to-month, and sometimes you have extra money coming in for which your original budget doesn’t account. Taking these common mistakes into account will help you along your way to financial security.
Never changing your budget.
As my introduction suggests, a budget should never be written in stone. Things change, different expenses and incomes come up, so your budget should adjust with the times. Here’s how the budget works in the Right-Click household: each month, I take the Excel spreadsheet from last month and do a Copy As for the next month. I then remove one-time expenses and other special items from the previous months and add categories that might be included in the next month. For example, our jewelry insurance is renewed once a year, so in January, I had to allow for a payment to this in our budget. Then, in February, we didn’t have the jewelry insurance to account for, but we did have some birthdays that required gifts. Each of these became their own line item. Some months have a bunch of these kind of extras, others not. Generally, I add any extra to the savings pile, and adjust the more expendable categories (like pocket money, or date night money) in the event of a bunch of extra expenses). After I’ve worked out the monthly changes, I email it to Mr. Right-Click, and he looks it over just to make sure he knows where everything is going, and that we agree on how we’re allotting things.
The bulk of the work involved with creating a budget is done the first two or three months you use one. After that, it should be relatively easy to make these kinds of changes. The main thing is to always be actively engaged in the management of your money, even when you are talking about small sums. Everything counts.
Always changing your budget, because it’s not written down.
By the same token, your budget needs to have some clear definition. There are items that you will always have to pay, every single month, regardless of what is going on with the rest of your finances. These should be written down and accounted for, on paper, or on a spreadsheet, or using whatever budgeting software that you prefer. This will have to be changed and updated based on the funds available and the expenses that are changing, but it cannot be done with any kind of accuracy if you are doing it in your head. Take the time to clearly define your budget and you will find reaching financial sanity is that much easier.
Not creating an emergency fund.
Creating your emergency fund simply cannot be put off if you want the rest of your budget to work. If you have no emergency fund, you will end up using credit cards (or worse, mortgage/rent money) when something disastrous happens. Do yourself a favor and place this at the top of your list for savings.
Not planning for infrequent or one-time expenses.
Sometimes expenses will come up that are not emergencies, but neither are they part of the usual budget, such as the jewelry insurance example I cited above. One way to plan for these expenses is to have an extra amount in your budget that is allotted for these kinds of miscellaneous expenses, or to create a “sinking fund” to account for them. This fund should be kept separate from all other savings, with the idea that it is to be used for one-time, infrequent, non-emergency expenses like insurance premiums, Costco memberships, or large gifts.
Leaving too much room in your budget.
Above I advocated leaving a little bit of room in your budget as an alternative to creating a sinking fund for non-emergency, infrequent expenses. This is OK to do so long as you commit to putting any excess from this kind of extra room into your savings at the end of the month. If you’re not sure you can do this, then creating a sinking fund is probably your best bet.