Budgeting can be challenging, and there are many pitfalls involved. Here are four common mistakes you should avoid making.
Most think budgeting involves money. False. Life goals drive budgeting. Budgets employ money to achieve their goals. What are you budgeting for? A popular answer is to save for a car, house, or retirement. This is a common error.
Budgeting | You should budget for your current and future. Budgeting can help you live a full life and thrive as a person. Only planning for retirement is like giving up on this life and awaiting the next. Four more budgeting mistakes:
1. Making your budgeting goal a dollar amount
A budget can’t be used to spend or save money. It’s illogical. Spending or conserving money must have a goal. Most people save money without knowing why, which is illogical.
Before you save for a house, you should have some sense of what the type of house in the neighborhood you want to live in will cost. If you are saving for retirement, then you should have some understanding of what you need to have saved by the age you are planning to retire in order to afford the lifestyle you want to live. If you are starting a business, you should know approximately how much you will need to spend up front. The goal is never the dollars; it is the purpose or reason behind the dollars.
2. Aspirational budgeting
Start a budget with your monthly income. Include actual earnings in your budget, not what you plan to make. Too many people use a bigger amount than they really earn because they hope to make more. This is sometimes based on historical bonuses or wage increases. You may not earn as much as you expect, leaving you in debt. Always budget based on income. If you make more, you’ll have a surplus,
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3. Budgeting backwards
Here is how most people create a budget: They add up all of their expenses (e.g., rent, car payments, clothing, school, etc.) and subtract that from the amount of money they make in order to see what, if anything, is left over. The leftover amount is what gets divided amongst savings, retirement, investing in a business, etc. This, however, is completely backwards and leaves most people with very little left.
Instead, you should start with the amount of money needed to achieve your goals. Then the amount left over gets divided amongst your daily living needs. For example, if you are an artist, you have to first figure out how much it costs to be a successful artist — materials, supplies, distribution costs, branding and marketing, social and digital media, etc. Once you subtract the costs of being an artist from your income, then the remainder is what you have to spend on rent, food, clothing, etc.
4. Forgetting to invest in yourself
We value material goods: a bigger home, finer automobile, expensive clothing, jewellery, etc. These items may bring brief excitement, but they don’t create long-term happiness or a full life. Before spending beyond your fundamental needs, invest in your well-being and experiences that will help you grow. Investing in your education, talents, creativity, and relationships are all methods to boost your happiness.
So, if you’re currently budgeting or just starting to create a budgeting plan, make sure you’re not making the four mistakes above. If you want to see true success while budgeting, make sure your goal is not a dollar amount, base your budget on what you’re currently making, start with the amount of money needed to achieve your goals, and don’t forget to invest in yourself.