While there are many goofs we make with our personal finances, there are 8 common budget mistakes to avoid. Luckily several of them are easy to fix (see #1). Others take a little bit of reflection (#4) and some require a little bit of dedication to the cause. Like any issue, the first step is to realize something’s wrong. The next step is taking the action needed to address it. Without further ado, let’s tackle these common budget mistakes and hop back on the path to financial freedom!
If you don’t have a budget in place you may be in for a rude awakening one day. Ever wonder how so many celebrities and rich people end up bankrupt? Yup. It’s not a lack of money that got them in a pickle. It’s a lack of management and a missing plan. Whether you make $50k a year or 50 times that, having a plan in place to manage your money will ensure you don’t end up like Nicolas Cage, Burt Reynolds, or Mike Tyson, to name a few.
It doesn’t matter whether you’re making a fitness, romantic, personal, financial, or other life shift. If you set an unrealistic goal with unrealistic expectations, you’re bound to fail and feel discouraged. Forget comparing yourself and your situation to others. (Easier said than done, I know.) Delete social media if you have to – what you see on there isn’t real or the full story most of the time anyhow. Focus on you and nobody else when it comes to your personal finances.
SOLUTION: Be S.M.A.R.T.! That is, set your budget using the S.M.A.R.T. goal technique. Be specific, choose something measurable, make sure it’s attainable and realistic, and decide on the timing of your goal. For example, “I will clear my debt of $5,167 dollars in the next 18 months by paying off $287 each month, while not incurring any additional debt.” is much clearer and easier to achieve than “I will be debt free.”. It looks silly when contrasted in this way, however mis-managed goals often stem from unclear expectation setting and planning.
Timing your budget can be tricky depending on how often you’re paid. Some businesses pay weekly or bi-monthly, while others pay monthly. There’s also the growing gig economy where freelancers live off of a more sporadic pay schedule. If all of your bills are due around the same time, it can feel stressful to stretch the remaining amount for other expenses.
SOLUTION: Plan! First off, if the thought of being paid once a month gives you anxiety, perhaps don’t look for jobs that follow that schedule. It sounds simple, but it can have a large impact on your overall well-being. When I moved to Ireland after university I quickly learned that it’s normal to be paid once a month in Europe. Luckily I already had great money habits in place and didn’t stress too much about having to make 1 paycheque last all month. In some ways the monthly paycheque is also a fantastic way to train your brain. Delayed gratification never felt so good on those paydays! Secondly, make sure to set aside money when you can. Whether you use multiple bank accounts (which could get costly if they each have fees), or automatic payments for recurring bills, or cash envelopes to divvy up your money, it’s a sure way to build a buffer for when money is scarce.
4. LACK OF MOTIVATION
A lack of motivation is one of the top reasons why people’s money plans fail. Why? Because without motivation people give up. This is true when learning a language, when building new fitness habits, or making changes in any other part of life. And, while extrinsic (outside) motivation has its benefits, intrinsic (your own) motivation is the most effective spark to keep you going. Don’t just create a budget because someone is suggesting you should. It has to be a tool that you genuinely believe will help you achieve your goals for it to work.
SOLUTION: Pick something you’re excited to work towards. Hate being in debt? Dying to make a large purchase? Itching to travel? Want to start saving for an early retirement/kids/treating your parents to a vacation/etc…? Use that as your lighthouse when the going gets tough and you’ll never waiver. For some, having a Post-It note on their desk or mirror helps to remind them of the purpose behind the practice. For others, creating a vision board provides inspiration, or telling people what they’re doing generates outside accountability. Whatever you choose to do, it doesn’t matter unless the end goal “sparks joy” for you to begin with. Find something that you want and work towards it. Simple!
5. HABITUAL OVERSPENDING
This seems to be the area that a lot of people focus their negative emotions on when it comes to budgeting. You’ve heard it before and so have I, “ditch the coffee shops and make your coffee at home”. While I don’t disagree that it’s certainly more cost effective (and environmentally friendly), you don’t have to eliminate every indulgence when creating a budget. On the contrary, I might suggest keeping one or two small treats in the plan, so long as their dent isn’t troublesome. Why would I suggest that? Remember motivation? If you get rid of all pleasure and are too rigid with your spending you’ll either end up miserable or the budget will fall to pieces. It’s all about moderation, folks! For example, I love eating out at restaurants and frequenting coffee shops, especially when they’re small businesses. My pockets aren’t overflowing with cash so it would be irresponsible to eat out multiple times a week. However, I think supporting local business is important and I love trying new food so I include the odd treat into my budget each month.
Another thing to consider with habitual overspending is whether the category is in your control (ie. coffee shops, gifts, clothing, expensive toys) or out of your control (ie. health scare). Depending on the scenario, you may have a few decisions to make.
SOLUTION: The swiftest thing to do is to cut unnecessary spending. If you’re not keen on that then you could cut the cards, metaphorically or literally, and use cash. It’s an effective way to realize exactly how much money you have access to spend. Another solution would be to shuffle your budget. There’s also always the option to increase your income with a new job, promotion, or side job. And last, get creative and see what other solutions you can come up with.
6. LOSING TRACK
Perhaps you took the first step and made a budget. And then you even took the second step and started following your budget. But then somewhere along the way you fell off the tracks and then never hopped back on. Keeping a budget (re: tracking your expenses) is very different from making one. It doesn’t have to be difficult or time consuming, though these are the complaints I’ve heard. Like any other habit you’re building, start small and build from there. Experiment with what works best for you to stay on top of tracking your finances.
SOLUTION: Do you prefer good ol’ fashioned pen and paper (does anybody else remember those bank books?), an app, the notes section on your phone, a glass jar, or another tracking method? Whatever you choose, make sure to account for every dollar and cent that comes in and out of your possession. Yes, every dollar and every cent. You may think not including $2 here and $20 is a big deal, but when it comes to your financial health, every little bit counts!
The last year in particular, 2020, has been a tough and even devastating year for many people because of job loss. It’s a big deal to lose a job, whatever the reason. Going from university or college or high school into the job market is also a big deal. It can be tedious and time-consuming and discouraging to look for work – but it’s not impossible and there’s always a way to make money. Sometimes it just depends on what you’re willing to do. If you are employed, hopefully you are able to stow away an ‘oh shit’ buffer fund should you ever find yourself between work.
SOLUTION: If you find yourself unemployed, there are a few tips you can follow to help alleviate any possible financial stress. First, get rid of all unnecessary expenses (it’s temporary so know that you’ve got this!). Second, assess your situation – is there an end in sight or are you in pandemic-unemployment-limbo? Third, make a list of your skills and see what you can do for odd jobs to bring in something on the side in the meantime. Fourth, create a job-hunting routine much like you would a normal work day. This will help with your mental health by having a stable routine, as well as establishing a consistent effort in the search to find something new.
8. TOO RESTRICTIVE
I think the number one reason people dislike budgets is because they (incorrectly) assume they’re too restrictive. The ironic thing is is that you decide how flexible your budget is, because you’re the person who designs it. If you feel your budget is too unrealistic, or that you keep on going over budget, or maybe you just feel miserable following it, then read on my friend.
SOLUTION: When budgets appear to be too restrictive you’ve got options. First, take a step back and assess the situation. Maybe you underestimated what you spend on groceries each month so you need to increase the grocery fund and reduce something else. Maybe you are a gig worker and you created your budget for those “good” months when the cash is flowing, instead of the “cricket” months when gigs are few and far between. Perhaps you’ve moved to a new city and the cost of living is much higher than where you previously lived. If you need to adjust, then do so! In fact, it’s very possible that your budget will need to have a little flexibility from month to month or season to season. Let’s say you own a car and live in a region where you require snow tires. In the months where you change your tires, there’s going to be a higher transportation cost than the other months (granted no repairs sneak in there). Maybe you’re at that age when everyone is getting married and the summer is looking a heckuva lot more expensive than say, February or November. Budget accordingly. A lot of this you will learn with time as you pay attention to your finances and your spending habits. And last, celebrate the small wins (they do matter!). Maybe you set a “no spending days” goal for a month and meet it – fantastic! Or, maybe you scored a deal on something that you really needed or wanted to buy – win again! Just make sure not to reward yourself with a splurge elsewhere. Trust me, the spending hangover isn’t as fun as the purchase and it lasts much longer.
Budgeting mistakes happen all the time, even to the pros. Have you made any of the ones listed above or can you think of some that I’ve missed? Let me know in the comments below!
TMc’s Budget Tip:
Personal budgets (like any goal-setting endeavour) are more likely to succeed when they’re simple, realistic, and attainable. If you haven’t heard of S.M.A.R.T. goals by now, a quick Google search will reveal everything you need to know about getting on the path to success. Also, the more aware you are of your income and expenses, the better-equipped you are with the information you need to build a plan. Once you have your plan, set mini goals whose achievement you can celebrate along the way to buoy you forward when things are tough. Spend within or under your limits. And, when possible, make sure to build your buffer fund so that in the event of unemployment, illness, or other unexpected life dive, you’ll be covered with some breathing room.
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