Most people don’t want to think about budgeting. It’s a process that is very emotional and can cause a lot of frustration. If you have a budget in place already, commend yourself, but make sure you don’t become a victim to some of the pitfalls of budgeting.
1) Spending more than you’re earning. This is a mistake anyone can make, and most people do. When you create your budget, don’t forget to add how much money you need for gas, lunch, and if you’re a coffee drinker, beverages. That Venti Frappuccino you drink every weekday is more than $4.50. That’s $90 every month. If that’s $90 you can use towards a credit card payment instead, cut out the Frappuccino. If that idea gives you the jitters, then allow yourself to have only two Frappuccinos a week instead of five.
Avoid impulse buying. Know your budget and stick to it. If you’re walking in the mall and you see a beautiful pair of shoes you think you must have, give yourself some time to walk around and really think about how this purchase will affect you. Most likely the only beneficiary of an impulse purchase is yourself. Tell yourself that your family needs groceries, your credit cards bills need to be paid off, your mortgage needs to be paid. Impulse buying is often the culprit behind people going way over their budget. So you don’t have the trendiest handbag right now — who cares? Isn’t it better to have a roof over your head instead?
2) Entertainment. When people budget their finances, they often think that means to ignore any type of entertainment. Entertainment and recreational activities allow us to blow off steam and relax. Consider 5% of your income a good amount for entertainment every month. If you’re spending a lot more than 5%, you’re spending too much. You can go to the movies, you can go out to eat. Just be reasonable in your spending and you’ll be able to enjoy your weekends.
3) Paying only the minimum on credit cards. When you carry a balance on your credit card, it’s easy to be overwhelmed by the total. When you compare the total balance with your minimum payment, however, the minimum payment always looks a lot less intimidating. However, making minimum payments on your credit cards will incur an incredible amount of monthly interest fees. By the end of the year your credit card balance may have gone up by a $1000 or more because you’ve only made that minimum payment. Pay as much as you can towards your credit cards every month. If you’re budget is stretched to the limit already, even with making minimum payments, try to at least add an extra $20 a month when you pay your credit cards bills.
4) Allocate money to a savings account and don’t touch it! Putting away money every month is beneficial for your financial well-being, whether it’s a traditional savings account or a money market account that earns larger interest. If you have a tight budget, even $200 may seem a bit too much for you. Look into saving $25 a week, that’s already $100 a month. After two years, you’ll have saved $2400. If you put your money into a money market account, you’ll earn interest over a period of time and therefore your savings will grow.
5) Have money readily available in case of a major illness or job loss. Ensure that you have enough money for 3-6 months. It’s difficult when you live paycheck to paycheck. You may fall into a financial rut and just continue living this way without making necessary changes to the way you handle your finances. Unfortunately, as you become complacent, you also start to think that nothing bad will ever happen to your or to your family members. Bad things only happen to other people, right? Not you. If this is your philosophy, it’s definitely time for a change. You never know when tragedy will strike. Don’t wait until it’s too late to do anything. Start saving now!
6) Use cash only. Allot a certain cash amount each week that you can spend. Obviously, if you go over that amount you can’t spend anymore. When you rely on using your debit card or even credit cards, the effect is not an instantaneous hit to your wallet. The money you spend will be debited out of your checking account or will be added to the balance of your credit card. But when you use cash, you physically see how much money you’re spending and how much you have left. This will make you think twice about an impulsive purchase.
7) Remember to incorporate home insurance, property taxes, and any federal or state taxes you know you will owe into your budget. A lot of people have their mortgage company hold an escrow account for them — you pay your monthly mortgage amount plus an additional amount of money that the mortgage company calculates to cover the cost of your home insurance and property tax. Also, if you are self-employed or did not have enough taxes taken out of your paycheck, you’ll need to calculate how much you’ll owe to the IRS or else you may be in a for a big surprise around tax time.
Groceries. Don’t skimp on this. Make sure you have enough money every week for this basic necessity. Everyone needs sustenance, and you and your family are no exception. Groceries are expensive, but by planning your weekly grocery list and menu, and choosing healthy alternatives for your family, it is possible to buy groceries on a budget. There are also coupons available online and in newspapers to help with the cost of groceries.
9) Pets. Don’t forget about these furry family members. Make sure you figure out how much you spend on a weekly basis on pet food. Also, figure on yearly veterinary visits and miscellaneous items like snacks, toys, and vitamins.
10) Be realistic. Fully understand your total monthly household budget. If you can’t sock away $200 each month for that rainy day fund, then don’t do it. Try saving a smaller, weekly amount. If you’re consistent, you’re savings will grow. Frivolous spending can also damage your financial health. Keep your spending intact; know exactly where your money goes.
Budgets can be aggravating, but don’t let it intimidate you. Take control of your life and your financial future today.