First Time Budgeting? Avoid Making These 6 Mistakes
You’re never too old, or too young, to start and follow a budget. Amy Maliga, financial educator at Take Charge America, said following a budget is the cornerstone of effective money management. A budget is a tool that helps you keep track of how much money you have coming in, how much is going out and exactly where it’s going.
Ready to start budgeting? Follow these steps to find out how much money you’re spending and avoid making rookie budgeting mistakes.
Not Using a Tracking Tool
Don’t make the mistake of drafting your budget on Post-it Notes. Maliga recommends using a designated tracking method you know you’ll be able to stick to like a spreadsheet, physical notebook or dedicated budgeting app.
Setting Outdated Financial Goals
Brittney Castro, financial expert and Mint’s in-house certified financial planner (CFP), said one of the first steps to starting a budget is to review your financial accounts and make sure you know where you stand in terms of your net worth.
Then, you’ll want to review your financial goals. Determine the priority of the goals you have and put them in writing so it feels actionable.
When setting financial goals, don’t make the mistake of setting goals that are no longer relevant to you.
“If you find the goals you made last year are no longer relevant or a priority for you, find a new direction for where you want to focus your financial goals,” Castro said.
Castro recommends reevaluating your financial plan with life changes or every year. As you set new goals, remember to stick to them over the long haul. Try to avoid making constant changes with every ebb and flow of life.
Not Tracking ALL Expenses
Keeping a budget means figuring out how much money you have coming in every month and the source of this income. This may include your take-home pay, freelance or side hustle pay, bonuses, spousal or child support and any government benefits.
Once you know how much money is coming in, it’s time to figure out and track your expenses. Maliga recommends tracking the following expenses.
- Fixed expenses: These are the expenses that stay the same each month including rent, mortgage payments, vehicle payments and insurance premiums.
- Variable expenses: These expenses change each month. Think groceries, utility bills, healthcare and credit card statements. Maliga said you may estimate variable expenses when first starting your budget. After a few months of tracking your spending, you’ll be able to better understand how much is spent and budget accurately.
- Periodic expenses: These are larger expenses, like back-to-school shopping or vehicle registration, that happen once or a few times a year.
“Keep track of all your expenditures for 30 days,” Maliga said. “Be sure to track every expense, large and small, even if it’s just a cup of coffee or pack of gum.”
Viewing a Budget as Restrictive
Your budget isn’t meant to restrict you. Rather, Maliga said it’s a tool that helps you achieve your financial goals. Use it to track your expenses and make adjustments to find a comfortable balance.
“Once you get used to it, budgeting should give you more freedom and peace of mind by taking the mystery out of where your money is going and whether you’ll have enough to make it through month to month,” Maliga said.
Making Late Payments
Don’t forget to pay your bills on time. This has major implications for your budget and credit score.
“Keep a close eye on bill due dates as timely repayment accounts for 35% of your credit score, so it’s key to never miss a payment,” Castro said.
Castro recommends setting up autopay on recurring debts. Think credit card statements and student loans.
Getting Discouraged or Burned Out
It’s easy to get discouraged when you first start a budget, especially if you don’t land at the perfect balance right away.
Maliga recommends setting realistic goals for yourself to keep from getting upset or burned out. She uses the example that if you order delivery out every night you might cut back on food expenses by cooking at home. Start with a goal of cooking a few nights a week. Increase those nights until you’re cooking more than ordering out.
Other situations where expenses outpace your income may require making bigger lifestyle changes. If you struggle to afford rent and monthly utilities, Maliga said you may explore finding a roommate to share living expenses.
It may be tough to start a budget, but remember that the keys to successful budgeting throughout every stage of your life are flexibility and consistency.
“Your budget will evolve and change over time as you experience income gains or losses, job changes and life events,” Maliga said. “But once you get in the budgeting habit, it will become second nature to apply these changes to your budget.”
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