Most people think of budgeting as something for the wealthy. So, it’s not uncommon to find people with no budget at all. Yet, a simple budget can make a huge difference to your financial profile, allowing you to control spending and achieve your financial goals.
As a rule of thumb, you need to save about 20% of your income — 30% can be used on debt repayments and 50% on everyday needs and obligations. While this simple approach is helpful, there are several mistakes you need to avoid to ensure successful budgeting and a sound financial life.
1. Setting up Unrealistic Budgeting Goals
While you might be motivated to achieve your financial goals or save up for that big-ticket purchase, keeping your goals realistic is vital. You don’t want to strain yourself or end up racking up more debt.
Instead, set realistic goals that will allow you to achieve your short, mid, and long-term financial goals. Be sure to consider your income level and find ways to increase your earnings to make it possible to achieve your goals.
2. Not Building An Emergency Fund
The most important way to save for a rainy day is by building an emergency fund. Having enough money for emergencies and other unexpected expenses such as medical bills, car repairs, and even retirement planning is essential.
No one can tell what will happen in the next minute, so preparing for those unexpected expenses is vital. Emergency savings will create a financial cushion to cover unforeseen costs. Beware not to use them as an excuse to spend money on things that are not emergencies.
3. Not Keeping Track As Per the Budget
Overspending and unplanned purchases are a big problem for many people, even if you have a budget. In this case, you’ll hardly have a clear picture of where your money is going, denying you all the benefits of having a budget.
The best approach is to review your monthly spending and costs to see where your money is going. Be sure to get your bank, card, or wallet statements to examine each expense and adjust your future expenses as needed to achieve your goals.
4. Failing to Update Your Budget
If you have a budget, ensure it’s updated every month, depending on your financial situation, lifestyle changes, and other factors. For example, if you decide to have a pet, you’ll need to factor in the additional costs of owning a pet, like food, vet visits, etc.
If you don’t update your budget regularly, keeping track of all the changes in your spending can be challenging. It can lead to overspending, poor budgeting, and even more debt. More importantly, before increasing your expenses, be sure you have enough income to support the changes.
5. Forgetting One-Time Expenses
It’s easy to track and record recurring expenses like utility bills and subscriptions. In fact, these costs are predictable, making budgeting somewhat easier for most people. That can’t be said for one-time expenses, which most people tend to ignore, yet they have a significant impact.
For example, if you have a yearly insurance bill of £1,200, be sure to allocate £100 to your monthly spending to make the cost predictable and save up for the bill. This way, you’ll not need to fork out the whole amount once when your bill is due.
Be Financially Sound with Budgeting
You should always be aware of how much money you spend — that’s the secret to proper budgeting. To begin with, you need to set realistic financial goals, make budget adjustments as your lifestyle changes, and build an emergency fund for rainy days or unexpected costs.
The ideal budget should give you a clear view of your expenses while affording you ample room for unforeseen costs. It should also align with your spending style and lifestyle — you don’t need to be overly frugal to stay in control of your finances.
