5 Budgeting Blunders

  1. Being too restrictive or strict

  2. When people start out making a budget, they are usually motivated by some recent happenings in their life, or reading inspirational material on this subject, or some such event. So, when they set out to prepare a budget they are all excited and determined. This could result in a budget that is overly restrictive. This can be detrimental to any budget. Think of the New Year’s resolutions – at the start of the year millions of people vow to cut out all fatty snacks and to exercise everyday. Yet, only few of them continue to keep their resolution past the first week. The ones that succeed are those that don’t attempt any dramatic changes, but rather add healthy habits a little at a time. The same thing works for budgeting too. Instead of cutting out all the fun stuff in one shot, start slowly by reducing a little bit of the excess at a time.

  3. Trying to track every penny, or trying to track every single expenditure manually

  4. When the better half and I started our war on credit card debt, we started out with a simple scheme. At the beginning of the month, we would write down all the bills for the month ahead, and decide how much would be paid towards each bill and leave only that which is absolutely necessary in the checking account. All day-to-day financial transactions were handled using a separate credit card, that should be paid in full at the end of the month. The reason this budgeting mechanism worked for us, and we were able to eliminate $40K+ in debt, is because, this system did not require us to track every penny, or to manually keep track of individual expenditure. Having to make a note of every expenditure and accounting for every penny can easily get very tiresome very soon, and could ruin the drive to stick with a budget. To this day, we use this mechanism of automating for our monthly budgeting where all but the absolutely necessary amount is automatically put into different accounts and only the amount left over in checking account can be spent. An expense can be charged to a credit card only if the bill can be paid in full at the end of each month, and we only use one credit card for day-to-day transactions making it easy to track our expenditure.

  5. Failing to plan for unexpected expenditures

  6. It is easy to plan ahead for known expenses. For instance, every month you know how much is require for rent/mortgage, utilities, phone, transportation costs etc. In addition, it is possible to mark a part of the budget for miscellaneous expenditure too. But how do you plan for entirely unexpected events? That is where an emergency fund comes in handy. Determine how much you would like to have in your emergency fund. (Ben @ Money Smart Life has put together a great article about this with help from many other bloggers that you may want to check out.) Every month put away a small amount of your pay check towards the emergency fund. Without an emergency fund (or some form of fallback plan), it is easy for small disturbances to throw your whole budget off the tracks.

  7. Counting the chicken before the eggs hatch

  8. This is the risk involved in any form of advanced planning. For instance, in our budget for this year, we had earmarked the money to be received in the form of annual bonus for payment towards our investment property. But to our dismay, we did not receive a bonus this year. For a while it seemed like things were going to be a bit bad, but we put off some vacation plans and shuffled things around a bit and managed the put together the required amount. I guess we were fortunate since we had a lot of wiggle room in our budget. Without the options to shuffle things around, things could have easily gotten quite ugly. It is necessary that you take your future income into account while putting together a budget, but make sure that the amount is not earmarked for critical expenses and that there is a plan B, if things don’t quite work out the way you expected.

  9. Finally, its all about the attitude

  10. If you start out with a budget thinking that it’s a boring chore, very soon it will start to grate on your nerves and you will find it hard to stick with your plans. Even the best intentions will be useless if you cannot follow through. So make sure you start out with a good attitude. Think of it as the ticket to your financial freedom. Revel in your reduced debt. Take pride in your bank balance as it grows. Think of it as a challenge to go from where you are to where you want to be. Dream of retiring in a calm serene place. OK… that’s my dream, you can replace it what you want :) But you get the idea. Make budgeting fun. Make it something you want to do instead of something that you have to do.

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Robert said...

It helps alot if you have rewards, for my wife and I we take out the same amount per week as we always have 300 euors anything left over goes towards our trip home. It has been wonderfull motivation to watch every penny, as we are on track to for the first time ever have money set aside for holidays before we go, bit of luck and we won't even need the credit card! A real first for us

rob in madrid

ispf said...

Robert: Yeah, you are right! Rewarding yourself is a great way to make sure you can stick to a budget. As long as the reward itself does not break the budget, that is ;)

PF101 said...

I also compare personal finance to dieting. I think there are lots of parallels. Thanks for a good post. It's a Post of the Day.