6 budgeting mistakes and how to fix them
spending your income wisely is the basic rule of smart personal financing. however, it isn't unusual if you feel daunted about tracking every single rupee that passes through your wallet or bank account.
the solution lies in setting up a simple budgeting system that takes the pain out of accounting and helps you identify your financial priorities.
why do you need a budget?
by creating a budget, you are building a plan for spending your money. undeniably, many people get bored with hearing the 'b' word.
still, once you address the elephant in the room and actually get down to budgeting, you have already conquered the foremost challenge to good financial discipline.
and, now that you have crossed the biggest hurdle, this post will help you avoid additional blunders to get the maximum benefit out of personal budget.
avoid these budgeting mistakes
1. failure to track expenses
the accuracy of your budget relies on your efficiency in tracking your spending. using vague figures to add up your expenses for budgeting will not take you anywhere. yet, many of us don't stop to think about how much we spend on food or personal items, often underestimating our expenditure significantly.
but how do you keep track of every penny you spend? do you need to be jotting down figures each time you purchase something and crunch the numbers each month to get frustrated and give up eventually?
thankfully, you can download any of the several budgeting apps on your smartphone to track all your spending electronically. some people also prefer the single-card method to get a consolidated expense statement at the end of the month.
however, different cards come with different privileges, and if you certainly need more than one card – a budget tracking app is the answer you are looking for.
some additional ideas you can implement to track your expenses seamlessly include putting your money on autopilot. putting your bills and investments on auto-pilot protects you from yourself by not letting you spend more than what you can afford.
by putting your bills, repayments, and investment on auto-debit, you benefit in several ways. first off, you won't have to worry about missing a payment or incurring a late payment fee.
second, paying your bills on time improves your credit score, which can give you access to better deals on your home loan or personal loan, in case you need one, saving you money over time. in addition, once all your liabilities and investments are paid off, you are only left with the money you can spend – curbing the tendency to overspend remarkably.
2. skipping the emergency fund
an emergency fund is essentially a pool of money to pay for unplanned expenses like sudden home repairs or unexpected medical bills. most experts agree that this fund should amount to three to six months of your living expenses.
the logic is simple: without a financial safety net to fall back on, you will have no choice but to dip into your long-term savings, or worse still, take out a loan or overspend on your credit card and incur more debts.
however, if you have a line item in your budget for an emergency fund, you will have a healthy pool of money to draw out from and meet any unexpected expenses with confidence.
build an emergency fund today by allocating a monthly amount that you will contribute to this fund as a fixed expense on your budget. you may keep your money in a high-interest rate savings account to maximize your benefit.
3. not planning your retirement
it is easy to neglect what we cannot see in the foreseeable future, like retirement. it is also one of the biggest financial blunders that can ruin a lifetime of hard work with financial troubles in your golden years.
experts believe that retirement planning must start early in life and feature prominently in your budget at all ages. you may be freshly out of college or a middle-aged professional, but planning your retirement should be a priority lest you find yourself wanting at an advanced age.
in India, many adults expect their children to take care of them after retirement. a study found that while 76% of working people in India expect a comfortable retired life, only 33% are putting aside money to fund that phase of life.
if you fall in the 33% category, it is high time you change that by setting aside some money each month for your future retirement. you may use online calculators to work out how much money you'd need for a comfortable retirement and accordingly start building your savings and investments to achieve your retirement goal.
4. ignoring the bigger picture
swapping your latte for home-brewed coffee and carrying lunch to the office are excellent options for boosting your savings but not good enough to maximize your budget.
by cutting small expenses and sweating the pennies, you are potentially ignoring the bigger picture – or bigger expenses – that are eating into your budget dramatically.
generally speaking, two factors prevent families from saving more. one, unexpected expenses or income loss. two, high fixed costs like car payments, education costs, mortgage, etc.
while we have already catered for an emergency fund to deal with unexpected expenses or income loss, the second factor calls for immediate attention. major purchases have the most substantial impact on your ability to save. therefore, it is vital to analyze big purchases to save more money.
so, if you have a mortgage and you haven't revisited your interest rate in the past three years, you are possibly throwing away your hard-earned money at the banks. it is always a good idea to compare your interest rate with the average market rate regularly and see if a better deal is available for refinancing your loan.
similarly, you can compare phone and internet plans online to get cheaper deals that will save you money every single month. insurance is another competitive field where you can save money by checking the cover you need.
of course, not having life and health insurance coverage is a blunder that can drain your emergency funds but paying for additional coverage that you don't need is also a common folly that you must avoid.
5. following a set and forget attitude
creating a budget is one thing and following it is another. life happens, and everything doesn't go as per plan. the same is the case for your budget.
while you can use all the budgeting apps in the world, you cannot truly automate or predict all your expenses, which calls for you to regularly revisit your budget and fine-tune it to cater for any new changes.
a set and forget attitude is a dangerous thing. if you continue following the same budget year after year, you are likely to lose interest and give up. besides, your income and goals are bound to change with time, and if your budget does not reflect these changes, it is not going to take you anywhere.
6. not seeking help
a survey conducted by Standard & Poor's financial services indicated that less than 25% of South Asian countries' adult population is financially literate. another source mentions that 76% of the adult population in India is not even aware of the basic financial concepts.
clearly, financial literacy in the country is a problem, and lack of knowledge often leads to budgeting and investment mistakes that can cost you dearly in the long run.
budgeting is hard, but there is plenty of help out there. instead of relying on friends and neighbors, it is always wiser to work with a financial advisor to get a concise and straightforward summation of your income, expenses, and long and short term goals.
a financial advisor will also help you allocate your money to each category systematically for a better chance of achieving your monetary goals in the stipulated time period.
good things are enjoyed better in the company of friends and loved ones. that's why it is also essential to discuss and plan your budget with your partner and be on the same page.
if budgeting is a potential cause of conflict, you can always work with a financial advisor to accommodate both your personal and shared goals into your budget.
in closing
when it comes to budgeting, it takes some time to get things right. but don't let past failures discourage you.
continue with commitment and a clear strategy to regain control over your finances and finally taste what financial freedom feels like.