One of the keys to financial success is creating and maintaining an effective budget.
One of the keys to financial success is creating and maintaining an effective budget. Yet I speak to so many people who either don’t have a budget or their budget always seems to come up short. If you struggle with budgeting or hate to budget, a nonprofit homeownership organization can help you to come up with a spending plan that you can stick to. It also helps if you change your mindset. Don’t feel restricted by your budget. Instead, think about how liberating it is. By creating a budget that reflects your priorities, you will always have enough money to spend on the things that are most important to you.
However, your budget must be effective if you want to meet your monthly obligations. Here are some mistakes that can leave you out of cash by the middle of the month.
Mistake number one. Not being realistic about your expenses. Before you create a budget, you should keep track of your spending and write down how much everything costs. One of the worst things you can do is create a budget that is not rooted in reality. For example, if it costs you $300 a month to feed your family of four, yet you always budget $100 a month for groceries, your budget is destined to fail.
Mistake number two. Failing to budget for savings. One mistake people make is to create a budget that includes all of their expenses, and simply save whatever is left. If you want to build wealth, you should make saving your number one priority. Pay yourself first, by budgeting a fixed amount or percentage each month that will go into savings and investment accounts. Make sure you set aside money for emergencies, retirement and major expenses such as buying a house.
Mistake number three. Forgetting non-monthly expenses. There are some bills -- such as the rent or mortgage -- that are due every month. However, others such as insurance bills, utility bills and tax bills may come due every couple of months or perhaps once a year. Your budget must account for those expenses, as well as your monthly bills. To make sure you have enough money set aside, divide the annual amount of your non-monthly bills by 12. That’s how much you should save each month so that you’ll have the money to pay those expenses when the bills are due.
Mistake number four. Failing to budget for fun. Many people create budgets that are so strict that they never allot for entertainment, vacations or other things that they enjoy. The problem with this is that eventually, these people get so frustrated and feel so deprived that they go over budget and splurge, creating a mess of their finances in the process. The best way to avoid doing this is to budget for fun. If entertainment, vacations or socializing is important to you, set aside a little money each month so you can enjoy some of your earnings today.
Mistake number five. Failing to adjust the budget over time. Few things in life stay the same, including the cost of living. Your expenses will grow over time due to inflation. Not only that, but your priorities will change and you’ll want to save money for different financial goals. The budget you made last year may need to be adjusted today. As you grow, make sure your budget keeps pace.