Common Budgeting Mistakes That Costs You Money

by Jalen & Sarah Bromley
Common Budgeting Mistakes

Budgeting is something that almost everyone knows they should do but few follow through on. One survey found that 65% of Americans don’t know how much they spent last month, leaving them in danger of running out of money or falling into debt. But even if you’re part of the 35% tracking their finances, you may be selling yourself short by making common budgeting mistakes.

In this article, we’ll run through some of the biggest slip-ups — and how you can avoid making them yourself.

Why you need a budget

Budgeting allows you to be intentional about your money and your life.

It ensures you’re living within your means and covering all your expenses, allowing you to sleep peacefully at night — no more worrying that you’ll have to feed yourself for the week with just $20 or that you won’t be able to cover rent. This peace of mind is particularly important for students who often operate within fine margins.

Once you become a budgeting pro, you’ll realize that tracking your finances also frees you up to have the occasional splurge. If you know that you spent $100 less than your budget said you could have, that’s $100 you can use to treat yourself without feeling guilty.

8 top budgeting mistakes

Let’s get straight to it. Below are eight of the biggest budgeting mistakes.

1. Failing to plan for savings and investments 

Some people think a budget is all about balancing income with spending. Seen through this lens, you’re doing everything right as long as you’re not going into debt by the end of the month. Unfortunately, this is a very short-sighted view of financial management.

Getting through the month shouldn’t be your only financial goal. You also need to prepare for retirement and future expenses — whether that means buying a house, saving for your children’s education, or anything else you have in mind.  This is why you should always dedicate some of your budget to savings and investments.

Many people make the mistake of only saving whatever money they have left over when the month is over instead of including it explicitly in their budget. But saving should be a priority, and your budget needs to reflect that. 

One tip is to set up an automatic payment that will leave your account the same day you receive your paycheck. This way, you won’t feel like the money is sitting there waiting to be spent or that saving is optional. Bonus points if you put the money into tax-efficient retirement accounts such as an IRA or 401(k), or high-yield savings accounts.

2. Setting unrealistic financial goals

When people start budgeting, they’re often highly motivated to sort out their finances and set themselves on a better path. While it’s great to be ambitious,  this can lead to making plans and goals you’ll never actually be able to meet. 

For instance, you might tell yourself you’ll save every dollar you’re not using for fixed expenses like rent and groceries. Then, when you inevitably spend money on a takeout or an impulse buy on Amazon, you’ll feel like you “failed” to meet your goal. This can be incredibly demotivating, and it results in many people giving up on something entirely and reverting to their old habits. Similarly, extreme dieters often decide that if they eat a single “forbidden food,” they already failed for the day and may as well continue to eat junk food.

In reality, it’s much better to follow a moderate diet than bounce from one extreme to another — and the same principle applies to your financial goals. 

Choose objectives you can be consistent with to keep your motivation high. It’s better to set aside some money for an entertainment budget and save a moderate amount than to convince yourself you’ll save a higher amount and live like a monk. The second option will likely end in you beating yourself up if you do spend money on entertainment, then giving up on the budget entirely and saving nothing. 

3. Neglecting an emergency fund

Making overly ambitious goals isn’t the only way we can be idealistic when it comes to budgeting.  It’s easy to be delusional about how much we need to spend each month and focus only on our fixed expenses.  For instance, if your income is $3000 per month and your fixed expenses are $2,800, you might tell yourself you have more than enough money to live comfortably. The truth is, if you can only save a couple of hundred dollars per month (or maybe nothing at all), you’re only one emergency away from a complete financial disaster.

While we recommend saving money into accounts that are tax-efficient or offer high interest rates, you shouldn’t pour every last dollar you have into them. You may face a penalty for early withdrawal or be unable to access your money instantly, which isn’t ideal for some situations.

This is where an emergency fund comes in. Set enough money aside in an instantly accessible account to cover unforeseen expenses. For instance, you may need to buy a new tire for your car or a plane ticket to attend a funeral — a budget can’t account for these expenses, but an emergency fund can. We recommend setting up your emergency fund before you turn your attention to saving for other purposes. 

4. Failing to track expenses

Often, the expenses we imagine we have and the expenses we actually have don’t line up. You might think you only need to spend $100 per week on groceries and build your budget on this assumption, but your bank account reveals you’re spending far more —  perhaps you didn’t account for all those small trips to your local store for snacks. 

Unfortunately, many people forget about or ignore these tiny transactions, convincing themselves they amount to nothing.

This mistake is easy to avoid. Simply consult your bank statements instead of relying on your own optimistic estimates. Prepare your account statements from the last six months and track how much you spent each month on different categories, such as transport or going out. Then, you can work out your average expenditure for each area. How much did you really spend?

5. Not repaying debt

Allocating money to paying debt can feel like throwing the money into a black hole. It’s often not as gratifying as allocating the money to savings, so you may be tempted only to make the minimum payment toward your debt and use the cash for something else. But financially, this rarely makes sense.

As a general rule of thumb, we should spend money on paying off debt if the interest rate we face is higher than the return we could make from saving or investing the money. If your credit card debt carries an interest rate of 20% and a high-yield savings account offers 5%, tackle the loan first.

One possible exception is if you don’t have an emergency fund yet. In this case, it’s better to focus on building this first so you don’t have to take out more loans to cover the next emergency.

6. Ignoring irregular expenses

Irregular expenses are things that we need to pay for infrequently. This includes annual costs like insurance and items we only buy a couple of times a year, such as vacations, haircuts, dentist appointments, and gifts.

These are tricky to include in a budget since we focus on how much money we aim to spend monthly, yet these payments only occur once or a few times per year.  The simplest remedy is to list all your irregular expenses throughout the year and divide the total amount spent annually by 12 (to account for the equivalent monthly cost). Notice how you underestimated how much you really spend?

If you want to be even more diligent, you could set up a savings account that allows you to allocate different “pots” to different purposes, so you can have one pot for each of these irregular expenses. For example, if you decide to spend a maximum of $1000 per year on gifts, you could put $83 into a pot for gifts every month and ensure that all gift purchases come from this account. 

7. Not accounting for small purchases 

As you can see, this list has a lot of entries related to not accounting for certain items in the budget. Now, we have another one: Neglecting small purchases. It may not seem worth including items that cost less than five dollars in your budget — it probably feels like they don’t impact the big picture of your spending. This is especially true if you buy things using spare change, which can feel less real.

For instance, buying a Starbucks a couple of times a week or giving some loose change to charity now and then may not seem worth accounting for. But even if you only spend $10 per week on these small miscellaneous purchases, it adds up to something more substantial over the month — and even more over an entire year. 

Things become particularly inaccurate if you tell yourself you’re only spending (let’s say) $300 on food per week, but you actually spend $2 per day buying yourself snacks.

This isn’t to say you can’t have that barista-made coffee again – just that you should account for all purchases, no matter how small.

8. Not assessing budget after setting it

The whole point of a budget is that you stick to it. It’s not just something you draw up to determine what you could spend in theory or an ideal world —  the aim is always to make real, tangible changes. The only way to do that is by checking if you’re actually staying on track with your budget.

This is why many people find it convenient to use budgeting apps or software.  Many of these apps sync automatically with your bank accounts and cards so that all your spending is displayed in one place. Then, you simply have to categorize your transactions and compare them with your budget. 

Struggling to stick to your budget in the first month or so is normal. When this happens, you simply need to identify the biggest culprits. For example, you might find that your grocery shops are more expensive than you anticipated, so you look at the receipts and realize you could save money by replacing a few luxury items with cheaper alternatives.

In other cases, you may realize you’re simply being too idealistic in your budget and need to adjust to account for all your expenses.  This is okay if you can still live within your means after adjusting your budget.

You don’t need to get your budget perfect the first time around, but you do need to keep trying to get it right eventually.

The best day to start is today

The path to financial stability is full of potential traps and opportunities to go off-course, from forgetting your emergency fund to overlooking small expenses. But remember that the biggest budgeting mistake of all is failing to budget altogether — so start as soon as possible and continually track your process.

For help on your journey, stay in the loop with Frugal Student. We share advice related to optimizing your finances as a student, and you can sign up for our newsletter for more tips.

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