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

You plan for typical ongoing bills expenses: groceries, utilities and gasoline. But oops, you forget about yearly expenses, like car insurance and property taxes. For planning purposes, simply divide yearly lump sums by 12 and allocate that amount for annual expenses every month.

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.)

Not Expecting the UnexpectedMany 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.)Not Tracking Past ExpensesA 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.Disregarding SavingsMany 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.Not Having an Emergency FundPaying 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.Not Including Small but Ongoing ItemsSmall 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.Putting Too Much Work InSome 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.Not Being FlexibleYou 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.Not Writing it DownNumbers in your head can be amorphous and inaccurate. Writing down the budget can add discipline and authority. Try a spreadsheet or online software.Not Changing ItSome 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.Not Being RealisticSome 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.

Budgeting is meant to empower, not cripple. Work within your means to create a budget that best fits your lifestyle. After all, it's your money, and you should have control over it.

Related Articles
  1. Home & Auto

    4 Areas to Consider Roofing Material Types

    Roofing your home is very important, that’s why you should choose a roof specifically designed to handle your area’s climate.
  2. Insurance

    How to Shop for Home Insurance

    Tips for getting the best protection for your place and possessions.
  3. Retirement

    3 Reasons Your 401(k) Is Not Enough for Retirement

    Learn the basic structure of a 401(k), and a number of reasons why it may not be substantial enough to secure an individual's living upon retirement.
  4. Budgeting

    The 5 Most Expensive States for Child Care

    To get a better sense of how child care costs can fluctuate, here's a look at the costs of child care across the country.
  5. Home & Auto

    Looking To Invest In Home Improvements?

    Some home improvement projects could cost you more to complete than they’ll pay out in equity. So, here we show you the worst projects to avoid.
  6. Fundamental Analysis

    Understanding the Internal Rate of Return Rule

    The internal rate of return rule is a popular method used to compare investments or projects.
  7. Home & Auto

    Are Home Inspections Worth It? - Price vs. Value

    If you’re wondering whether home inspection is worth the investment, the following information will help you decide.
  8. Insurance

    How Does Cash-Value Life Insurance Work?

    Cash-value life insurance pays a beneficiary upon the death of the policyholder, and accumulates a cash value during the policyholder’s lifetime.
  9. Budgeting

    How to Defray Long-Term Care Expenses

    Here's a handful of options on what you can do to defray long-term care expenses.
  10. Budgeting

    The True Cost of Home Caregiving

    Caring for eldery family in-home might be unavoidable, but most caregivers don't realize the true cost of doing so.
RELATED TERMS
  1. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability ...
  2. Equitable Division

    A legal theory that guides how property acquired during the course ...
  3. Debt Consolidation

    The act of combining several loans or liabilities into one loan. ...
  4. Personal Spending Plan

    Similar to a budget, a personal spending plan helps outline where ...
  5. Nest Egg

    A substantial sum of money that has been saved or invested for ...
  6. Fudget

    A falsified statement of income and expenses. A fudget or "fudget ...
RELATED FAQS
  1. How soon should I start saving for retirement?

    The best answer to the question, "How soon should I start saving for retirement?", is probably, "yesterday," and the second ... Read Full Answer >>
  2. Can I use my 401(k) as a collateral for a loan?

    Although federal Internal Revenue Service, or IRS, regulations prohibit using a 401(k) account as collateral for a loan, ... Read Full Answer >>
  3. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  4. What is the range of deductibles offered with various health insurance plans?

    A wide range of possible deductibles are available with health insurance plans, starting as low as a few hundred dollars ... Read Full Answer >>
  5. How do I know how much of my income should be discretionary?

    While there is no hard rule for how much of a person's income should be discretionary, Inc. magazine points out that it would ... Read Full Answer >>
  6. Why do economists think it is important to track discretionary income?

    Economists track discretionary, and disposable, income as a proxy for the growth in the financial health of average citizens ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!