Budgeting is one of those things that no-one really talks about but everyone in a good financial position has. If you have been scraping by, wondering why you can never stick to your budget or boost your savings account, rest assured you are not alone. Here are five common budgeting mistakes and how you can avoid them.
1. Falling For Predatory Lenders
It’s not only the company with shady online ads or midnight television commercials that offers the too-good-to-true loan schemes targeting the vulnerable. Some big businesses and known names also offer predatory payday loans which can end up costing you a lot more in the long term. If you need help with an emergency expense or urgent financing, look at safer low interest or no interest loans from reputable not-for-profit lending organizations. These lenders are more transparent, offer smaller loans that are aimed at helping people financially rather than maximizing the amount of profit.
2. Confusing ‘Wants’ With ‘Needs’
Your baseline for forming your budget is your living expenses. This category includes utility bills and any costs associated with things like board, food, health, work, study, and debts for yourself and your dependents (if you have any). Once you have this baseline, you can factor in things like entertainment subscriptions, dining out, travel, and leisure activities. If you’re wanting to save money, be honest with yourself about the distinction between wants and needs. Compromising on something important like healthcare for lazy luxuries will lead to regret, and in the worst case, debt.
3. Not Having Emergency Savings
Regardless of how strong the economy is, the majority of households do not have enough emergency savings. This can drive families to unscrupulous payday loans which lead to a vicious cycle of debt and hardship. Protect yourself by creating or growing your rainy-day fund. Put aside whatever you can spare – whether it’s 20% of your income or 5%, something is always better than nothing.
Eventually, aim to cover 2-6 months of your basic living expenses. If you’re a frivolous spender, it may be worth locking this account so that you can only access it in person at the bank. Hopefully, you will never face an emergency that necessitates draining this fund, but if the need does arise, your future self will thank you.
4. Too Much Or Too Little Leeway
Be mindful when setting a budget that although you can try your absolute best, you cannot plan for everything. Always leave some leeway for emergency expenses like a bill costing more than usual, or an unexpected fee or fine turning up. This way, you won’t feel out-of-control if it happens. If you are not aggressively saving for something in particular or paying down debt, you can also afford to leave a little more room for maneuvering. Remember that you are creating your budget to help manage your spending and saving, not to punish yourself.
5. Keeping Your Budget In Your Head
Keeping your budget in your head and not on paper is a recipe for stress. You’re also setting yourself up to fail as you are less likely to remember detailed plans if you have no visual cues. You don’t need to be a spreadsheet enthusiast to create a clear, basic budget. There are plenty of free online resources on how to make a budget and how to use it effectively. Afterward, remember to reevaluate it regularly as your needs and goals will surely change over time.
Now that you’re familiar with some of the most common errors to keep clear of, it’s time to get started on perfecting your budget!