Summary of the blog –
Budgeting is a prudent financial activity for people who wish to save for the future. It helps reduce the habit of overspending and differentiating between needs and wants. However, even a well-planned budget may fail due to some common mistakes like not keeping a track of the expenses or guessing the expenses instead of knowing the actual amounts which might cause over or underestimation of the expenses. Budgeting also helps in settling aside emergency funds that can be used without hampering the long-term savings.
Top Budgeting Fails and How to Avoid Them
With the constantly increasing inflation rate, prices of goods are going up day by day. However, the earnings remain the same. In such a situation, how can a person save money for a new house, or for their child’s education? One way people can control their expenses is by budgeting. By budgeting, you can plan your expenditures and save for your future without compromising on your desires. Budgeting is a significant financial practice, although even well-planned budgets can have problems. That’s because of some common mistakes that people tend to make. Here are a few big-budget mistakes and how one can avoid them:
1. Not having a budget at all – the biggest financial mistake is not having a budget in the first place. Not having a plan of your spending for the month may mean you are either overspending or not spending enough. Moreover, if you are overspending shows you are not saved for the house you might need or for your retirement.
How to avoid: to start with you can focus on one or two monthly expenses like groceries, rent, child’s fees, etc., and keep on adding items for budgeting as you become comfortable with the listed expenses.
2. Playing a guessing game for expenses – the first time you start budgeting your income and expenses, you might not know what amounts to put for the expenses. At this point, you might start guessing the expenses which might cause overestimating or underestimating the actuals.
How to avoid: For the first month you can track your expenses under various categories and then total the amount to set the baseline for the coming month.
3. Not keeping track – when you are monitoring your expenses, it is important to record all the expenses throughout the month. If you do not keep a track of the spending, you might tend to forget to put that down on your budget or might put in the wrong amount. This will lead to overestimating or underestimating. Also, you might not know whether you have reached your limit of spending.
How to avoid: Try to find a tracking system that works for you. It can be software, a spreadsheet, or even a pen and paper. Once you start recording all the expenses, you will know exactly where you are overspending and give yourself the responsibility to stay on the budget. Make sure to include all the expenses on the budget be it a one-time expense like a gift or regular expenses.
4. No emergency fund – an emergency fund is a sum of money that can be used for unforeseen situations. This fund must be sufficient to support at least six months of monthly expenses. If you do not have an emergency fund you might need to spend your savings or worse you might need to take credit. But, if you have one, you can use it when needed without hampering your savings.
How to avoid: You can budget for the emergency funds just like any other financial goal. Decide on a monthly amount that you want to set aside for the same as part of the savings and stick to the plan of always contributing the amount so that you have the emergency funds when needed.
5. Budget for Recreation - Avoiding recreational activities like going out for a movie, or a lunch with friends, etc. is a budget pitfall. You can spend on all these activities as long as it’s under your budget. Depriving yourself of all these makes you blow your spending plan.
How to avoid: You can split your income into a 50:30:20 ratio. Whereby, 50% of it can go to regular household expenses, 30% for spending or wants, and 20% for savings. Also, make a classification between the needs and wants.
6. Not trying to reduce expenses – You might think that recurring expenses like electricity, water, television, and internet bills are non-negotiable and have to be paid as the amounts stated. How to avoid: efforts can be made to reduce the consumption of power when not needed; this will reduce the electricity bill. Also, if your internet provider is charging a lot you can choose to switch to another one who might provide the same at better rates.
How to avoid: efforts can be made to reduce the consumption of power when not needed; this will reduce the electricity bill. Also, if your internet provider is charging a lot you can choose to switch to another one who might provide the same at better rates.
To conclude, having a budget is just not enough but one has to abide by it to make it successful. You can also take help from experts like ShePays that can help you plan your savings. It aims at providing financial planning education to stimulate interest in finance by eliminating fears and inhibitions. It helps you invest your savings into investments that will help secure yourself for a stress-free future.
How do I account for One-time expenses?
You can create a separate item in the budget for such expenses that occur occasionally or seasonally. These expenses can include birthdays, gifts, travel, doctor visits, etc. For the expenses which are huge and one-time, you can put them in the emergency funds as these are meant for such unforeseen situations only.
How much should I invest regularly?
The amount to be saved or invested depends on various factors including age, liquidity needs, disposable income, and debt. A person aged might have fewer responsibilities and more time for retirement. Hence, they can afford to keep a smaller amount for savings. But a person over the age of 45 might have to save more. You can also consult experts like ShePays.
How do I keep a track of my expenses?
There is various free software available online that can help you with budgeting. You can also use spreadsheets to create headers of the expenses and track them regularly. However, you can also go old school and simply do it with pen and paper. One effective way of tracking expenses is that you can separate the amount for each expense into various envelopes. So that you know while spending how much is left for that particular expense. But nowadays everything being digital not many people keep cash in hand hence, this might act as a drawback.
How do I always have extra expenses that are not in my budget?
You can create an item into the budget with the heading miscellaneous. You can check for expenses in the previous months that did not fall under budget and see if they are fixed or can be adjusted against any other head. If not, then add them to the miscellaneous head, and based on the frequency you might create a separate expense head for the same if needed.
When is the right time to start budgeting?
There is no right time as such to start budgeting. One can start at any time. In fact, it is advised to start as early as possible because this will help you to save for a longer duration of time. Also, a younger person has fewer responsibilities; they might not be much affected by the budget failures. They have time to learn from their budgeting mistakes.
Safe Banking Never share your password, card number, expiry date, CVV, PIN, OTP or other confidential information with anyone even if the person claims to be from ShePays.[email protected] 68, Akashneem Marg, DLF Phase 2, Sector 25, Gurugram, Haryana 122002