6 Things Most Americans Don’t Know About Budgeting

Young woman sitting at home and making home finances.
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As we bring in another new year, many of us will be thinking about budgeting because many of us think about the new year as a fresh start; a clean slate to help us finally get things in order.

However, there is a lot to think about when setting a budget. It may seem like a simple task — and it can be — if you do things right. But one or two minor missteps can compound over time, throwing your finances into disarray.

Hence, it’s important to set your budget up the right way, and the new year is the perfect opportunity to do just that. To help set you on the right track, we want to cover some of the things you may not have considered, along with some input from experts. In addition, we’ll cover some unconventional budgeting tips as well as budgeting mistakes. Covering all your bases will help you start your budget the right way in 2022.

1. How Much You Are Spending

If you already know how much you are spending, this may seem obvious. But many Americans don’t know, and setting up a budget is impossible if you don’t. “In a recent local survey, 1500 of USA residents were asked about their spending habits and 65% answered that they were unaware of how much money they spend in a month,” said Janet Patterson, loan and finance expert at Highway Title Loans. “To put it into numbers, most Americans overspend by $7,500 every year.”

Knowing how much you are spending is the first step toward setting up an effective budget. If you don’t know the answer to this question, you can either set up a budget spreadsheet or use a budgeting tool or app to get organized.

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2. Where Your Money Is Going

Once you know how much you are spending, you must also know where your money is going if you want your budget to be effective. “For example, dining out is often a big expense category and an easy place to save money,” said Nick Bormann, Ph.D., CFP® at Bormann Wealth Management, LLC. “But, first figure out how much goes there every month, and you can make realistic targets for reducing money spent there – rather than setting dramatic goals that might not be hit.”

3. Sinking Funds

Not to be confused with sunk costs, sinking funds are a way to ensure you always have enough money to cover your basic expenses. One approach involves periodically setting aside money in order to gradually pay off debt. “I recommend that people have a sinking fund for – house repair, car repair, medical needs, and vacation,” said Kari Lorz, certified financial education instructor and founder of MoneyfortheMamas.com.

Doing so helps you gradually repay your debt while having enough money to cover other expenses. You can also make it automatic so you don’t have to think about it. “Set up an automatic transfer right after payday (so there’s always money to transfer), and a small portion goes into the funds,” Lorz said. “Then at the end of the month, tally up any expenses from the sinking funds you used and transfer that money back into your regular checking to pay your bill.”

4. What Are the Trends?

Some expenses, such as your mortgage or car payment, might stay the same year after year. But other expenses can fluctuate, whether it’s due to changes in your life or things happening in the world. Consider COVID-19, which made a lot of people eat out and travel much less.

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“For instance, monthly expenditure on bills and utilities decreased nearly 200 USD from 2019 to 2020,” said Kyle Kroeger, founder of The Impact Investor. “Tracking monthly and yearly expenditure can reflect accurate changes in inflation, pricing, and purchasing behaviour, hence budgeting can be optimized accordingly.” You can track these things manually, or use a budgeting tool, many of which will help you see the trends.

5. Account for Irregular Expenses

In addition to tracking trends, you should also be aware of irregular expenses. These are expenses you may encounter sporadically, perhaps once a year or a few times a year. But some of them can be significant, so we still have to keep them in mind.

“For example, there are gifts for Christmas and birthdays, wedding gifts if you’re anticipating attending weddings, vet or medical exams, and car or driver’s license registrations,” said Jacqueline Gilchrist, founder of Mom Money Map. “Make sure you have estimates for these irregular costs so no expenses are missed.”

6. Tying Your Budget to Your Current Place of Residence

Thanks in part to the COVID-19 pandemic, many people are thinking about relocating these days. The increase in work from home allows people to greatly reduce their expenses while maintaining their current income.

“People need to stop basing their monthly budgets on the city they work and live in,” said Marco Sison, a financial coach at Nomadic FIRE. “As most companies have already announced remote work as part of their 2022 business strategy, workers need to leverage this unique opportunity to slash their monthly budgets and improve their financial situation through geographic arbitrage.”

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