4 Budgeting Mistakes You Are Probably Making (and How to Avoid Them) Budgeting can be challenging, and there are many pitfalls involved. Here are four common mistakes you should avoid making.
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Most people think budgeting is about money. It's not, really. Budgeting is actually about life goals. Money is simply the tool a budget uses to achieve those goals. Before you create a budget, ask yourself: "What am I budgeting for?" A common answer is that you are budgeting so that you can save money for something in the future, like a car, a house, or retirement. This is the first mistake most people make.
Rather than budgeting just for your future, you should also be budgeting for your present. You should be budgeting to make sure that the life you are living now is fulfilling and that you are flourishing as a human being. Planning only for retirement is like giving up on this life and waiting for the next one to come as soon as possible. Here are four additional budgeting mistakes you may be making:
1. Making your budgeting goal a dollar amount
The goal of a budget cannot be to spend or save a certain amount of money. That makes no sense. The goal has to be what you are spending or saving money for. It is completely illogical to set aside a certain amount of money without knowing why you are setting that money aside, yet this is what most people do.
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
In order to create a budget, you must start with how much money you are currently bringing in on a monthly basis. This may seem obvious, but the amount of earnings you include in your budget needs to be the actual amount you are making, not what you hope to be making. Too many people use a higher amount than they are actually earning when creating a budget because they expect to be making more than they are currently. Sometimes this is even based on reliable data, like historic bonuses or wage increases. However, there is always the possibility that you do not end up making what you expect, in which case you will not have earned enough to satisfy your budget, and you will end up in debt. Always base your budget on what you are currently making. That way, if you end up making more you will have a surplus, which is never a bad thing.
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 tend to prioritize budgeting for the material goods in our lives: a bigger home, nicer car, expensive clothing, jewelry, etc. While these things may bring temporary joy, the truth is that they do very little in terms of long-term happiness or creating a fulfilling life. Before spending beyond your basic material needs, you should invest more in your well-being and experiences that will help you flourish as an individual. For example, budgeting for your continuing education and developing new skills, creative endeavors and relationship-building are all ways to invest in 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.