Budgeting is not only necessary for your financial health, but it is also an important skill to develop if you want to achieve financial independence sooner by having more control over your spending. There are many decisions that you need to make when it comes to managing your finances, and each of these can be costly mistakes that can ultimately derail your success.
Everyone’s first experience with budgeting is usually disastrous. It seems that no matter how hard you try, there are always little hiccups that prevent you from getting out of debt. But if you stick to the rules you’ll eventually make it through. Here are tips to help you avoid some common mistakes in your first budget.
Your first budget is a big deal. It’s the beginning of the end to the control you’ve had over your money for years. Just like any new relationship, you will make mistakes along the way that either end the budget or end the relationship.. Read more about common budgeting mistakes and let us know what you think.
How To Budget Your Income – Expenses
Budgeting entails allocating or distributing your money. In a budget, there are three main expenses: spending, saving, and investing.
When we talk about spending money, we’re talking about all of your normal living costs, which may include items like:
- Gas, water, and electricity are examples of utilities.
- Insurance for your home, vehicle, and health
- Transportation and gas
- Amazon Prime and Netflix are two examples of entertainment subscriptions.
Because it requires a certain degree of self-discipline, this section is usually the most difficult for most individuals to learn.
But, as with everything else, you must exercise financial discipline on a daily basis. Then, when you attempt again and again, it will improve with time.
Furthermore, you may feel like your budget is a failure during the first month of budgeting, but remember that it will take time and effort to properly predict all of your expenditures, so keep making changes until you have a solid grip on your spending.
If you don’t have a savings fund that covers at least three months’ worth of expenditures, you should add it to your list and start saving.
In the case of a job loss and a leaking roof, a savings fund will save you from depending on credit cards and retirement money.
For example, if your monthly overhead is $4,500, you’ll need at least $13,500, or three months’ worth of expenditures, in your savings account to safeguard you in the event of an emergency.
You may also set up a $2,000 short-term emergency fund in your bank account for minor mishaps such as flat tires or hospital copays.
This manner, you may put your whole emergency money into a savings account and let it grow until you’re in severe financial difficulty.
Due to the increasing cost of goods and services – often referred to as inflation – you should cease adding additional money into your savings account after you have a minimum of six to twelve months worth of expenditures saved up.
Inflation implies that the money you have is losing its buying value. To put it another way, you can’t purchase as many products and services as you used to since the cost of items has increased.
For example, a Big Mac at McDonald’s used to be five dollars, but today it’s seven dollars. A large mac is still a giant mac; the components haven’t changed, but it’s just more expensive to get one.
The typical savings account in the United States pays 0.04 percent per year, while inflation raises prices by 1-3 percent each year (2.60 percent in 2021).
This implies that if you hold $10,000 in your savings account for a year, you will earn a total of $4. (assuming 0.04 percent interest rate)
On the other hand, the typical stock market return is between 7% and 10% each year, which is more than enough to offset inflation.
So, although a bank is a fine location to store your emergency cash, it’s not the best place to put your money if you want to create long-term wealth.
As a result, after you have a fully funded savings account, you should put any remaining funds in your investments and watch them increase over time.
However, for the sake of your financial stability, ensure that you and your family have an emergency savings fund.
An investing portfolio, like an emergency fund, can shield you against the increasing cost of living due to inflation.
Inflation in the United States has historically been about 3%.
That implies that if your family’s grocery budget was $5,000 per month last year, your grocery budget for this year must be $5150 per month in order to purchase the same quality of food.
Stocks and real estate investments, for example, may help you stay up with inflation and create a stronger retirement plan.
If you want to invest in stocks but aren’t sure what to buy, index funds and exchange-traded funds (ETFs) may help you get a broad view of the market.
When you establish an online brokerage account, you may purchase stocks, bonds, and ETFs, allowing you to invest in the market from anywhere in the globe and frequently at cheaper costs.
If you’re interested in real estate but are hesitant to spend a large sum of money in a single transaction, you may invest in Real Estate Investment Trusts (REITs) or Crowdfunding.
- Real Estate Investment Trusts (REITs) are stock corporations that hold commercial real estate and are publicly traded.
REITs allow investors to combine their funds to invest in real estate that they otherwise couldn’t afford to purchase outright.
Investors who wish to diversify their stock portfolio with commercial real estate may turn to REITs for diversity, liquidity, and a high dividend yield.
- Crowdfunding is a platform that allows investors to get access to a portfolio of real estate in return for a portion of the rental revenue, interest, and appreciation.
Fundrise is one example of this kind of platform.
Without the burden of owning actual real estate, you can become a real estate investor with Fundrise.
Even better, you can start investing in real estate with as little as $500. This is ideal for individuals who have just recently begun budgeting and are uncertain how much money to devote to the investment category but do not want to lose out on the opportunity to start investing.
This is a fantastic way to get your feet wet in the real estate market without risking your whole life savings.
Finally, it doesn’t matter which one you choose to invest in; both REITs and Crowdfunding allow you to get exposure to the real estate market without risking your whole life savings on a single transaction.
More information on how to start investing with as little as $100 may be found here.
Keeping Tabs on Your Monthly Expenses
Tracking where your money goes after it leaves your bank account may help you not only understand what you spend your money on, but also re-evaluate your financial choices and make changes as needed.
You can keep track of your expenditures in two ways.
- Use a notepad or a spreadsheet — This is the most hands-on method, and it’s extremely simple to get started.
Whenever you make a purchase, make a note of it in a notepad or a spreadsheet.
This method takes a bit longer, but it will offer you a clear picture of where your money goes each month, whether it’s for your monthly entertainment subscriptions or the additional side of guacamole in your food order.
This will also assist you in re-evaluating all of your financial decisions and learning to be more disciplined.
If you don’t want to write everything down right immediately, you may save all of your receipts to help you keep track.
If you don’t enjoy keeping receipts, make sure you maintain a written record of every transaction you make since you may forget about it later.
- Use an app to monitor your income and expenses — Apps like Mint can help you keep track of your income and expenses from your bank accounts, credit cards, and retirement accounts.
If you don’t enjoy writing things down, there are applications like Mint that may help you keep track of all your expenses.
Mint tracks your income, spending, and savings by linking your credit cards and bank accounts.
Every purchase is automatically labeled and classified for you, ensuring that you have an exact and structured record that you can go to if you need to make a budget adjustment.
However, unlike manually recording your expenses, you may not have the opportunity to reconsider your decisions immediately after you make a purchase. That means you’ll need even more self-control to make smarter financial choices when you go shopping.
Both approaches have advantages and disadvantages. However, at the end of the day, it makes little difference whatever method you choose to monitor your income and expenses since the goal is to arrange and record your budget. So long as you can properly monitor it, you may choose the one that works best for you.
Decide on the kind of budget you want to create.
There are a plethora of budgeting plans to choose from, but once you’ve found one that works best for you, stay with it.
Budget with No Limits
A zero-based budget is one in which every dollar you earn from employment is matched by every dollar you spend on individual expenditures.
That implies that every dollar you own has a duty to perform, whether it’s paying your rent, school loans, or credit cards.
Assume you earn $3,000 each month. This might be how your budget would appear if you used a zero-based budgeting strategy. The entire costs amount to precisely $3,000 in total.
- $1,000 per month in rent
- $375 for groceries
- $100 for insurance
- $200 for gas
- $100 for entertainment
- $300 in emergency money
- a $200 student loan
- $150 for utilities such as gas, electricity, and water
- $100 for the internet
- $70 for a cell phone
- $250 for retirement
- $155 for vocation and travel
Because each category has a set amount that you may spend every month, or at least until the next paycheck, when you have a zero-based budget, you can spend your money with less worry and shame.
However, for a novice budgeter, a zero-based budget may not be the best option since it requires a lot of guesswork in the first month of budgeting, which may cause you to overestimate one item while underestimating the other.
Plus, it won’t stop you from going on a buying spree with your credit card — you’ll have to depend on your own self-control in such unforeseen situations.
Fortunately, we can address the credit card problem with the following budget plan; it eliminates the usage of credit cards, allowing you to learn to be more disciplined with your spending.
Budget in an Envelope
An envelope budget, as the name implies, involves the use of envelopes; first, you establish your spending categories and set spending limits for those expenditures; then, you match each category with one envelope, cash your paycheck, and deposit the allocated amount for each category into the appropriate envelope.
It’s essentially a zero-based budget, but with just cash.
Let’s suppose you get a $300 paycheck. If that’s the case, your budget could look like this.
- In the rent budget envelope, there’s $150.
- In the food budget envelope, there’s $75.
- 30 dollars in the utility budget envelope
- Budget envelope with $15 in savings
- $30 in the budget envelope for investment
This is especially useful for those who have problems with credit card overspending.
You may only spend the amount of money in the envelope each month. You won’t have to worry about overspending since once the envelope is empty, you won’t be able to spend from that area until your next salary fills it.
If there is money left over in any of the envelopes at the end of the month, you may either leave it in that envelope for the next month’s expenditures or take it and put it in your emergency fund.
You may utilize the 75/15/10 technique to distribute your money if you’re not sure how much money to give each area.
- Rent, food, and insurance will account for 75% of every dollar you earn.
- Every dollar will go towards savings, such as your $2,000 emergency fund, and a full emergency fund equals six months of expenditures.
- 10% of every dollar will be invested in index funds and exchange-traded funds (ETFs).
With this approach, you must ensure that all of your monthly expenditures do not exceed 75% of your take-home income, leaving you with the remainder to invest in your financial future.
The 75/15/10 approach has one significant advantage: you’ll always have a part of your money dedicated to your financial future.
If you find that 75% of your income is insufficient to cover all of your expenses, excluding savings and investments, you should take a hard look at everything you’re spending and assess the importance of each one; if you’re not using it, cancel or remove it so you can put that money toward savings or investments.
You should begin investing as soon as possible since the younger you are when you begin, the more money you may accumulate throughout your lifetime.
Assume you are 20 years old and decide to invest $360 each month in the stock market. Even if you never generate above-average wages, you’ll most certainly accumulate millions of dollars by the time you retire.
If you wait until you’re 40 to start investing, you’ll need to set aside $2,000 a month to get the same results.
As a result, if you have a fully funded savings account, you should put that money into investments so that more money may be put to work sooner and produce more revenue.
If you’re single and don’t have many obligations, we suggest using the 50/20/30 approach, which is comparable but considerably more severe.
- Every dollar you earn will be put towards your expenditures to the tune of 50%.
- Every dollar will be put towards savings at a rate of 20%.
- Every dollar you spend will contribute towards your assets at a rate of 30%.
This will not only help you save more quickly, but it will also allow you to invest more aggressively and earn more money.
Furthermore, the sooner you can set up a comprehensive savings account, the more secure you will be when things don’t go as planned.
New Budgeters Make These 4 Common Mistakes
There are four typical budgeting errors that individuals make in the first few months.
A Budget That Doesn’t Exist
If you don’t know where your money goes after it enters your bank account, it’s difficult to accumulate riches.
Small expenditures, such as a short trip to the convenience store, may be easily forgotten, but when they pile up, they can quickly turn into a large financial hole that you can’t get out of, which can be financially and emotionally exhausting for you and your family for a long time.
So, to avoid a scenario like this, start budgeting right now.
Lack of an Emergency Fund
You may find yourself in more difficulty than you can manage if you don’t have some additional cash on hand before a crisis.
Little things like a flat tire or a trip to the doctor may put you in a tight spot if you don’t have enough money to pay those unexpected costs.
You may not be able to go to work if you can’t repair a flat tire.
If you can’t visit a doctor while you’re sick, even a little illness may prevent you from earning a paycheck for a month (or even longer).
When you incorporate an emergency fund in your budget, you may save a lot of financial problems.
This is why you should start saving for an emergency fund — even a $2,000 short-term savings account may rescue you from a variety of financial problems.
Expenses that occur on a semi-regular basis should be ignored.
Birthdays, holidays, and yearly premiums are examples of expenditures that many people overlook since they don’t happen very often.
More than half of Americans who borrowed over $1,000 to finance Christmas expenses in 2017 were still repaying the loan three months later.
Debts like these may be a significant financial burden for a long time, requiring you to forego numerous chances and experiences like a beautiful house, a dependable vehicle, and a family trip.
Make a note of all your semi-regular expenditures and put aside some money each month so you don’t get yourself into a big financial hole.
For example, Thanksgiving dinner costs $55, Christmas gifts cost $175, your birthday costs $250, and a family trip costs $1500. Then, to avoid getting into debt that you can’t manage, you should put aside $165 per month in advance.
Do You Believe You Can Survive Without Having Fun?
When you create a budget, believing you can live without pleasure is like thinking you can start exercising for three hours every day for a year – it’s impossible.
There may be moments when you will be tempted to attend that movie, stay out with your pals, or get that extra scoop of ice cream.
So, rather of waiting for that event to happen and relying on your credit card, put aside a little part of your salary for you to enjoy all of the things you love.
For example, if you earn $3,000 each month, you may put away 5% of your earnings, or $150, as “fun money.” This is the cash you have available to spend on anything you choose, whether it’s new clothing or a meal at your favorite restaurant.
Not only will you be financially secure and organized, but you will also be able to enjoy the fruits of your labor.
The Foundation Of Wealth Creation Is Budgeting.
A budget for your money is the foundation of any financial strategy.
The two most important actions you can take to protect your financial future are to understand how much money you have and how to effectively allocate it.
Your financial future is entirely dependent on how you manage your money now, regardless of whether you have a six-figure income or live paycheck to paycheck.
Every budget begins with determining how much money you have left after taxes and deductions and concludes with dividing that money between spending, saving, and investing.
Building an emergency savings account can safeguard you in a disaster, while your investments will safeguard you against increasing living costs due to inflation.
However, after you’ve saved aside six months’ worth of living costs, you should stop putting money into savings accounts and instead put it into investments that will increase your money over time.
Learn to budget your money now for the sake of your financial stability, so you can take control of your personal finances and pave the way for a bright financial future for you and your family.
Budgeting is a powerful tool to help you make better choices. You know, it’s one of the things that makes the difference between living paycheck to paycheck, and being able to save for something special without worrying about making ends meet. This guide will help you navigate the basics of budgeting, including how to create a budget, how to adjust an existing budget, and how to know when you’re making the right choices.. Read more about what are some pitfalls of budgeting and how can they be avoided and let us know what you think.
Frequently Asked Questions
How can you avoid a budget misuse?
It is important to keep track of your budget and not overspend. If you find yourself in a situation where you are spending more than what you have, it is best to cut back on some of the unnecessary expenses that you may be making.
Whats a common budgeting mistake to avoid?
One common mistake to avoid is not saving enough money for emergencies.
What are the three 3 common budgeting mistakes to avoid?
The three most common budgeting mistakes are not tracking your spending, living paycheck to paycheck, and overspending.
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