Think of your budget as your compass. It's your guide, steering you in the right direction (and it's ok if you’re lost every once in a while). Your budget gives you a sense of direction and helps you smoothly navigate the course.
However, sticking to a budget isn't always easy. There are common mistakes that can derail your plans. How can you avoid these pitfalls and keep your budget on track?
To navigate the world of budgeting and its challenges, it's important to recognize these potential mistakes and implement strategies to avoid them. So, let's explore the top 10 budgeting mistakes to watch out for and how to maintain effective budgeting practices—that guiding compass.
#1: Not adjusting your budget
Regularly reassess and adjust your budget throughout the year. Not changing your budget is a common mistake that can lead to overspending, particularly in areas where costs may have increased.
Did you get a raise or start a new side hustle? Ensure you have a plan for the additional funds to avoid aimless spending and maximize your money-growing opportunities. Our recommendation: Invest it (or at least some of it). Any increase in income can be an opportunity to boost your investments.
A few watch outs:
Inflation: As of December's CPI report, inflation is up 3.4% over the past year, and certain categories and products are no doubt up more than that.
Investing: Inflation also impacts how much we need to save and invest. For example, over the past few years, inflation has increased how much you'll need to invest for retirement — what used to be $400 per month may now be $500.
Student loans: Student loan repayments resumed in October for over 43M Americans with an average payment of over $500 per month. These payments should be included in your budget. If you can afford your payment, add it to your budget under “debt repayments”. If you're having trouble making it work, reach out to your loan servicer and explore your options — repayment plans, deferred payments, and even updating your income can help reduce your payment.
#2: Not including saving & investing in your budget
Don't overlook saving and investing when creating your monthly budget. It's a common mistake to think these aren't necessities because they aren't immediate expenses. But, remember: a comprehensive budget also allocates money to your saving goals and investing practices.
Best practice: Origin financial planners recommend saving 8-15% of your monthly income depending on how much space you have in your budget. Once you have 3-6 months saved in an emergency fund, you can drop that to 0%.
#3: Not accounting for debt in your budget
Ignoring debt repayments, especially those with high interest like credit cards, is a common budgeting mistake. These debts can hinder wealth-building, so you'll want to prioritize debt repayments when building out your budget.
First, create a plan. Outline which debts to pay off first, usually those with the highest interest, and how much to allocate towards them each month. Include this as a non-negotiable monthly expense in your budget.
#4: Overestimating how much you need for each category
A prevalent budgeting mistake is overestimating your monthly expenses in specific categories. For instance, if you allocate $400 for groceries each month, but your actual needs only amount to $200, you might unintentionally spend the full $400.
How can you avoid this mistake? Review and tally up your past expenses to set realistic limits. If you don't hit your budget limit, can you save or invest the rest?
#5: Using a budgeting method that isn't right for you
Budgeting can seem daunting and overwhelming, especially if you're more of a free spirit. However, there are tons of budgeting methods out there—there’s not a one-size-fits-all approach— so use one that's best for you.
A few common budgeting methods
Zero-Based Budget — Allocate every dollar: Assign a specific purpose for every dollar of income, ensuring a comprehensive and detailed budget.
Pay-Yourself-First Budget — Prioritize saving: Emphasizes saving a predetermined amount or percentage of income before addressing other expenses.
50/30/20 Method — Three-category division: Divides income into three categories - 50% for needs, 30% for wants, and 20% for savings, providing a clear framework for budgeting.
#6: Not automating bill payments
Failing to make timely payments can significantly damage your credit score and add unnecessary strain to your budget due to accumulating penalties and fees. Consider setting up automatic payments to ensure timely payments and potentially save money.
Many companies offer discounts to customers who utilize this feature, making it a win-win for maintaining a healthy budget and credit score.
#7: Navigating budgeting solo
When managing your finances, don't try to tackle budgeting all alone. Incorporate insights and advice from reliable sources, and utilize online resources for valuable tips and information. Taking on budgeting by yourself can easily lead to tunnel vision, and rob you of valuable insights that can be gained from other perspectives. Openly talk about your budget with your community to learn from others and discuss the challenges, wins, and opportunities.
Consider a comprehensive money management app like Origin. We simplify budgeting and provide smart recommendations and insights tailored to you and your spending.
#8: Only thinking in dollar signs
A common budgeting mistake is solely focusing on dollar amounts rather than percentages. For example, spending $10,000 per year on car payments might not sound that bad in dollars, but if you're making $50K, that’s 20% of your income.
Utilizing percentages can help you see what you’re truly spending in certain categories, and emphasize just how much of your budget they’re consuming.
Pro tip: Origin's budgeting tool provides both dollar amounts and percentages.
#9: Missing expenses that don't happen monthly — especially annual expenses
Budgeting for monthly expenses is simple, but accounting for irregular expenses is trickier and also important to factor into our budgets.
“These tend to be big-ticket, non-negotiable expenses: things like property taxes, car insurance/registration, or private school tuition. Make sure to budget for these by putting aside a proportional amount every month, so you have it ready when the bill comes in.” — Matt Shapiro, Certified Financial Planner™ professional
#10: Not budgeting based on your values
Just because your friends and neighbors spend a lot on something doesn't mean you should too. Be thoughtful around your budget and spend on items and experiences you value. When you spend in areas you don't value, you subtract from other, more meaningful areas in your life and your budget.
“If you like to travel, increase that part of your budget knowing that it may leave you with less money for other things. Alternatively, if you're a car person — add room in your budget for auto expenses/going to car shows - knowing that leaves you with less money for going out to eat or travel.” — Matt Shapiro, Certified Financial Planner™ professional
It’s completely okay to make mistakes — and it’s often how we learn and grow. By recognizing these mistakes, you can avoid them and set yourself up for success in the long run.
Budgeting can be daunting, but at Origin, we're here to open up the financial conversation and empower you to manage your money with confidence and ease.
We help you set up a personalized budget and provide smart recommendations to help you hit your financial goals. Plus, you can track your net worth, expenses, and investments to see the full picture of money coming in and coming out. You can sign up for a 30-day free trial here.