Making a budget is a great idea for the majority of us. But many people draw up budgets that have fairly obvious oversights that render their work useless. To create a realistic budget, avoid these common pitfalls.
- Not Planning for Yearly Expenses
Yes, it's easy to forget about bills that don't show up at your door every month, but you're probably better off paying the total bill at once, since most companies levy an extra charge for monthly payments. Remember to also plan for other non-monthly expenses, like school supplies, pet care and gifts. (The tips in Holiday Spending Or Spending Holiday? will have you singing "Joy to the World" well into the New Year.)
Many people don't set aside money for medical expenses, car repairs and home maintenance. But are these so-called irregular costs really unexpected? Almost all cars and homes eventually need repairs. The amount of repairs depends on age, quality of construction and maintenance.
Sure, unexpected breakdowns happen. But you can predict some costs, at least roughly. When shingles on your 25-year-old roof with a 25-year-warranty are curling up, it's time to start setting aside money. Save money by shopping around and getting quotes, instead of hiring the first contractor who returns a call. (Be prepared before you buy - learn the basics in Used Car Shopping: How To Avoid A Lemon.)
A good way to get a handle on irregular expenses is look at past expenses. How often you went to the doctor or mechanic last year can indicate how much you'll go next year. Plus, some costs are seasonal. Gas and oil bills are higher in the winter, and electric bills are frequently higher in the summer when air conditioners run.
Many people contribute to savings only what they happen to have left after they've bought everything they want. A better way is to reverse that thinking. Decide what you will contribute to savings and stick to that amount, then buy what you really need.
Paying attention to savings will help build an emergency fund. Financial planners recommend building up two or three months' worth of emergency savings, in case of job loss or severe illness.
Small items, like eating out for lunch, add up quickly. A $3 cappuccino every workday comes to $75 a month - would buying a coffee machine be a better option? Look at these types of items, if your budget isn't paying off the way you'd hoped.
Some people write down every amount they spend everyday and track every penny. You should be able to maintain a budget with a reasonable amount of record-keeping.
You don't have to be too restrictive - trade amounts in different categories. For instance, spend less on eating out in one month and buy some new shoes the next.
Numbers in your head can be amorphous and inaccurate. Writing down the budget can add discipline and authority. Try a spreadsheet or online software.
Some people drop their budget instead of changing it. You should be able to change it as new income and expenses arise, or you find that your previous planning wasn't accurate.
Some people set down unrealistically low spending limits, and then become discouraged when they run out of money and can't meet their goals. The point of a budget is not to stop you from spending money at all or from treating yourself once in a while. Instead, it is meant establish your priorities and you give you sense of control, and free you from guilt about spending.