What Not to do When You’re Budgeting

Things to avoid so you can build and maintain an effective budget.

Budgeting don'ts

It’s a common misconception that maintaing a budget is a big hassle – that it’s time-consuming, difficult and hard to maintain. On the other hand, much of this misconception comes from people focusing on the wrong thing or getting too caught up in specifics to understand the big picture.

If you build a budget the right way, use today’s technology to make it easier, and avoiding the budgeting don’ts that we list below, you’ll be surprised how easy it is to manage your money effectively day-to-day. You’ll have an easier time saving money, reaching your financial goals, and avoid problems with debt.

Fact: According to the BLS, average expenditures per consumer were $51,442 in 2012 – up 3.5% from the prior year.

Budgeting Don’t No. 1: Don’t be too concerned with exact numbers when you first start.

One of the things people first struggle with when they start budgeting is how to set spending guidelines. After all, most of the expenses you have aren’t exactly the same every month. Fixed costs like your mortgage and insurance are easy to plan around. But flexible and discretionary expenses are a little trickier.

So if you’re trying to set your monthly expenditure on something like groceries, the best thing you can do is take an average of what you spent in the past three months. Set this as your spending target initially.

If you need to raise it later because you can’t meet that goal, that’s okay. Just make sure that your budget still balances out so you don’t spend more than you earn and have the money you need to set aside for savings.

Of course, not all flexible expenses can be averaged. Your utility bills can’t quite work that way. In this case, using the seasonally highest bill as your monthly expenditure. That way, when you use the most power or water, you’re not struggling too short on the payment.

Budgeting Don’t No. 2: Don’t be too general with your budget categories.

While averages and estimates work for setting the expenditures of your budget, you’re better off being as specific as possible when it comes to budget categories. If you’re too general with the spending categories that you set in your budget, it makes it harder to see where your money is going and where you’re overspending.

For instance, categorizing food expenses in one bulk category doesn’t really tell the whole story. On the other hand, if you split food up between groceries and dining out, you get a more accurate picture of how you’re spending money on food. If you categorize even further and break out work lunches from dining out, it becomes even clearer.

If you have things in specific categories, it makes it a lot easier to cut back when you need to spend less. This way, if you wanted to save up for a vacation or a special occasion, you’d see how much you’re spending on lunches out while you’re at work and could assess how many lunches you’d need to take from home to save a certain amount each month.

Budgeting Don’t No. 3: Don’t leave savings to chance

Savings needs to be planned into your budget. If you leave savings for whatever you have leftover at the end of the month, it’s often the case that you never actually save anything. So you have to plan savings into your budget just like you’d plan bills and other obligations. Think of it as an obligation to pay yourself every month.

Fact: According to the Department of Commerce, the current personal savings rate is 5.3% in the U.S. as of June, 2014.

Pop Quiz

According to the U.S. Bureau of Economic Analysis how is your personal savings rate calculated?

a. Monthly savings ÷ net monthly income

b. Savings as a percentage of total expenditures

c. Yearly savings ÷ gross yearly income

d. Savings as a percentage of disposable income

Reveal Answer

Tip: Disposable income is defined as income after taxes and other mandatory charges. It’s effectively the money you have to save and/or spend every month.

d. Savings as a percentage of disposable income

Return to question

Using your budget, you can determine how much money you can save every month. Then, set that amount as a spending target in your budget – just like you would for any other expenditure. This will help assure that you actually set aside the money you need to protect your assets and reach your financial goals.

Budgeting Don’t No. 4: Don’t be afraid to set fixed budget amounts for flexible debt payments.

Credit card debt usually doesn’t have fixed payments. You either have to pay off your balance every month (for cards like Amex) or pay off a percentage of what you owe (for cards like Visa and MasterCard). In either case, you don’t have a set amount of money that you know you’ll have to pay every month.

On the other hand, just because your credit cards have variable payments, it doesn’t mean that you can’t set amounts that you want to pay every month. And when you set those payments, set them higher than the minimum payments.

If you pay more than the minimum amount required every month, you get out of debt faster and avoid problems. So, let’s say you have a credit card with an outstanding $7,500 balance. Depending on the payment schedule, your minimum payment would be between $150-$200. But if you can afford to pay off $250 every month, go ahead and set that amount as a fixed payment. You’ll shave years off the time it takes to pay off the debt and save thousands on added interest charges.