Buzz
Building a basic budget isn’t too difficult, and with a few smart tips and tricks, you can make it really strong. However, even a solid budget can go off course. There are several common mistakes that trip people up, but the good news is that these errors are simple to fix.
Over-Restricting Your Budget
Budgeting might not be the most thrilling task—it ranks right up there with filing your taxes or cleaning the cat’s litterbox—but the sense of accomplishment from organizing your finances and starting a budget can be surprisingly enjoyable.
In the excitement of getting started, many of us tend to go overboard with a budget that’s overly restrictive and unrealistic.
I’ve been through this myself. I’ve discussed this before, but after finishing college, I dove deep into personal finance books, and I got really excited about using my money to achieve my goals. My priority was paying off my student loans as quickly as possible, so I created a budget that allowed absolutely no room for fun, luxuries, or optional expenses. Surprise, surprise: it didn’t work. Even the smallest impulse buy would completely derail my budget, making it ineffective.
Another issue with an overly rigid budget is that you eventually get frustrated with all the restrictions, which leads to a spending binge. You end up spending more than if you’d just allowed yourself a small amount of “fun money” to enjoy.
What’s a better approach? Create a budget that fits the life you’re living. When you’re working through your budget and assigning categories, be practical. Don’t set yourself up for failure by thinking you’ll never buy anything unnecessary. Give yourself some flexibility.
Budgeting for a Life Beyond Your Means
On the flip side is a little phenomenon known as lifestyle inflation. Lifestyle inflation becomes a problem when you start spending on things that exceed what you can afford. It sneaks up on you: a subscription to HBO here, an expensive dinner there. Before you know it, your expenses have inflated, and you’re spending more than you’re earning. To cover these costs, many people end up budgeting next month’s paycheck to cover last month’s expenses. “Rent is due on the 1st, but I get paid on the 5th; hopefully they won’t cash the check until then.”
The numbers and dates might align, but it still adds pressure to your budget and keeps you stuck in a paycheck to paycheck cycle. Many people find themselves trapped in this cycle because they genuinely can't make ends meet, but a lot of people get stuck because they’re budgeting for an unrealistic lifestyle. If this sounds like you, it’s probably time to start over. Evaluate your financial situation, trim unnecessary expenses, focus on your financial goals, and create a new spending plan.
Budgeting Without a Clear Purpose
It’s tough to stick to a budget that lacks a goal. What’s the point? Without a clear goal, your budget becomes an afterthought, instead of a strategic plan to achieve your financial objectives.
When I got out of debt, my budget didn’t really have a clear purpose. I knew I wanted to save and live below my means because that’s what all the personal finance books advised, but I had no specific reason for saving, so I wasn’t really motivated. I would often buy things I didn’t need, and I didn’t keep track of how much I was spending at restaurants. My strategy was basically: spend what I want, then save whatever’s left.
You might find yourself doing this too if you’re in debt. Without a clear direction, you just make the minimum debt payments each month and spend the rest. Instead of treating your savings or debt goals as an afterthought, take the time to define them. What do you really want to do with your money? If it’s a big goal, break it down into smaller milestones. Either way, set a goal for your budget, and assign it a category. For example, after I paid off my debt, I took a moment to think about what I wanted to do with my money, and decided I wanted to travel outside of the U.S.—something I had never done before. That became my new budgeting goal.
The 80/20 budget is perfect for this because it suggests allocating 20% of your income toward your financial goals and the remaining 80% to everything else. It’s essentially what you’re already doing, but now your goal is tied to a specific number, and you have the flexibility to adjust it as needed.
Forgetting to Account for Irregular Expenses
If you’re consistently overspending because random expenses “pop up” each month, you’re probably not accounting for irregular expenses. This is a common budgeting issue, but it’s easily fixable: identify those quarterly, annual, and unpredictable expenses, and factor them into your budget!
Take a moment to think about all the irregular expenses you may encounter. If you’re not sure, review your bank statements from the past year. Here are some typical expenses that people often forget to include in their budget:
Car insurance premiums
Higher utility bills during the winter and summer
Holiday shopping
Web hosting fees
Routine pet expenses, such as vaccinations
Oil changes and car maintenance
Home improvement projects
Quarterly taxes
School supplies
You can easily incorporate these into your budget by taking the annual expense and dividing it by 12. So, for example, if your holiday spending is $400, that becomes a monthly “payment” of $33. You simply set aside that amount each month so when the time comes, you’ll have the money ready. If you use a budgeting tool like Mint, it will do the math for you.
But sometimes unexpected expenses arise. A relative’s wedding one month. Your car needs a new battery the next. If this kind of thing happens regularly, it’s smart to budget for it. Create an “Everything Else” category that sets aside some cash for those regular yet unpredictable costs that crop up each month. Your budget might get tight, but at least you’ll be prepared.
Lacking a Financial Cushion
Irregular expenses also show why it’s so important to have an emergency fund. When your car breaks down, you can dip into your emergency fund instead of messing up your budget for the next few months until you can get back on track. It might slow down your progress toward other goals, but having an emergency fund will prevent you from derailing your budget completely.
Beyond having an emergency fund for peace of mind, it’s also wise to overestimate your budget. As Femme Frugality advises, “Budget Liberally. Spend Conservatively.” Here’s how she explains it:
Budgeting generously means that when you estimate you’ll spend $75 on gas for the month, you budget $100. It’s about planning for more than you expect, not underestimating just to make the numbers fit within your income. It’s about giving yourself some wiggle room so you’re not caught off guard.
Once you have your numbers, you can assess whether you need to hustle to bring in more income. This is much better than getting to the end of the month and realizing you should’ve worked harder to earn more, only to find you don’t have enough money for basic necessities.
It’s a proactive approach, and when it comes to budgeting, it’s a smart one.
Although we support automating your finances, that doesn’t mean ignoring them and never revisiting them. Your budget should evolve as your life does. Check in from time to time to ensure your budget is still aligned with your needs and goals.
Illustration by Fruzsina Kuhári.
