It’s no secret how I feel about budgets. I’m a firm believer that everyone needs a budget – regardless of how much wealth you have. Budgeting is the foundation of any good financial management system. Not only does it help you control costs, but it also helps you save money, become debt free and grow your wealth. It’s a skill that takes time and practice to learn and master. However, budgeting isn’t always easy. If your budgets are constantly failing, you might be making one of these budgeting mistakes.
Your budget does not evolve
A static budget is one of the most common budgeting mistakes I see all over the place. You’re constantly evolving which means the way you use your money is constantly evolving too. As you change, so should your budget. If you just set your budget once and try to meet that same budget every month, then you’re missing the point.
By doing this, you’re not considering the changes that occur in your life. And I’m not just talking about huge events like weddings and travelling. It’s the little things, too. It means you’re not preparing for things in your life that you probably knew were coming. You’re not preparing for the summer when you might be running the air conditioning all day long. You’re not preparing for the spending spree you indulge in for your birthday.
Your budget is not set in stone. It needs to evolve and adapt for changes in your life to actually work. It takes continuous work and effort – you can’t just do it once and think you have control over your finances.
One of the ways I like to keep my budget fresh is to start with my budget calendar before I set any spending limits for the month. I ask “what’s going on in my life?” before deciding what my budget will probably look like. I also pull out my budget for the same month last year to see what was going on and what my actual expenses looked like. This helps me determine what to expect for my current budget.
All you’re doing is adding up what you spend each month
While tracking your expenses is the basis of any good budget, don’t just stop there. That’s the absolute opposite of what a budget should be and a common budgeting mistake. You don’t get points for only adding up what you spend every month. Because that isn’t budgeting – that’s just maths. On the plus side, it means you’re probably not giving excuses like “I don’t like maths” to avoid budgeting (you know how much I hate that!).
However, you can’t really be blamed for only adding up your expenses because that’s what some budget systems tell you to do. It’s a method that I completely refuse to teach. Adding up your expenses means nothing. The real power of your budget is in analysing your money and understanding what the numbers are telling you.
When you’re only adding up your spending, you’re spending time on a reactive task that you aren’t going to learn from. As a result, you won’t be able to actually take control of your finances.
Your budget is your plan for your money and it evolves with analysis every time you set your budget. Tracking without a plan to track against is missing the point of a budget and is not giving you any control.
Further, you won’t be able to change your budget as your life evolves, because you won’t know how changes in your life and circumstances impact your finances. This will inevitably make it more difficult to achieve financial freedom.
You’re not using a zero-based budget
A zero-based budget is a simple idea. Basically, you’re telling every dollar you have what to do, and there are zero dollars left that don’t have a plan. I believe that the best budgets are always zero-based budgets.
Every dollar that comes in needs to have a purpose whether that is to be spent, saved, invested, donated or just to sit in your account as a cushion against unexpected expenses. When you create a zero-based budget, you’re giving every dollar has a plan.
Dollars that don’t have a plan are often overlooked and are not being put to good use. They’re not working towards your financial goals. Instead, they’re slacking off, chilling out and those are the dollars that are easy to splurge because they haven’t been considered in your plan. This is one of the easiest budgeting mistakes to make.
You aren’t considering all your financial decisions
Too many people think a budget is only your bills. This is absolutely not true. Your budget should involve all the decisions you’re making about your money, including:
- bills and fixed expenses;
- variable spending (which are expenses that might fluctuate);
- any cushion or buffer you leave in your account for unexpected expenses;
- anything you save or invest or have previously saved or invested;
- all income.
This is the point of a zero-based budget. Every dollar must have a plan. If you’re not considering every dollar, you’re not getting a complete picture of the state of your finances. How can you expect yourself to make informed financial decisions to meet your goals if you can’t see the whole picture?
You don’t know how to read and understand your money
To me, this is the most dangerous budgeting mistake you can make. But here’s the good news: this is an easy problem to fix, even though it’s a common myth about budgeting. The ability to read your money and understand what it’s trying to tell you is one of the most crucial parts of budgeting. Being able to read finances is not something we’re born with and, unfortunately, it’s not something taught in schools (at least not when I was in school).
But that doesn’t mean you can’t learn how to do it now. It’s okay not to know how to read your finances when you first start budgeting. But don’t just say you don’t know, or you’re not good with numbers and leave it at that. If you don’t know, learn.
Learn how to read your numbers and what those numbers mean. If you want to change your life, you need to take control, commit and start learning. Contrary to popular belief about accountants – I wasn’t born wearing my dorky glasses and with a calculator clutched in my tiny baby fist.
Similarly, there’s nothing about money in my DNA. Everything I know about money, I had to learn. And, believe it or not, I don’t consider myself to be good at maths. But I’ve built a successful career as an accountant because I learned to read money. If I can do it, I know you can do it too.
Your budget is not a realistic reflection of your life
This is probably the biggest and most common budgeting mistake people make. Your budget needs to be the most realistic reflection of your life and decisions that you can possibly create. When your budget isn’t a realistic reflection of your unique life, you’re going to fail your budget. It’s as simple as that.
Despite what many people think, budgets aren’t designed to be a generic list of what you “should” be spending. If that’s what you think then you will always find budgets too restrictive. A budget is nothing more than a plan for your money. You’re in control – you set the plan.
It should be realistic based on the current state of your finances, the circumstances of your life and the financial goals you’re trying to achieve. If it isn’t realistic, then it’s pointless. You’ll find yourself chasing your tail and getting nowhere.
Now that you’re aware of some of the biggest and most common budgeting mistakes, you can start avoiding them. These mistakes are some of the biggest roadblocks that will keep you from creating the lasting financial freedom and independence you crave. I recommend that you create a zero-based budget that is an accurate reflection of your life and changes as your life changes. I’m also a huge believer in financial education and budgeting the right way. After all, it’s your money and your financially free future on the line.