by 
How you budget your money matters. Unfortunately, many people fall into financial traps set by society or simply fail at properly managing their finances because they aren’t paying attention to what’s happening.
You don’t have to fall victim to these financial woes. You can change your financial future for the better by avoiding these common budgeting mistakes. Are you ready?
Common Budgeting Mistakes You Can Avoid
1. Not having an immediate emergency fund of $1,000 in cash.
This emergency fund is designed to protect your budget and keep you on track. Life’s emergencies are going to happen. It is not a matter of if, but when. Most emergencies cost less than $1,000. A stolen purse or wallet can leave you without access to your money for an extended period of time. Have the cash!
2. Not creating rules for spending or saving.
It’s important to put rules in place. Here are a few rules worth creating for your budget:
- A married individual cannot purchase anything over $50, for example, without talking to their spouse first.
- Do not buy any more on credit unless you can pay the entire balance off at the end of the month.
- Money made working overtime and “found cash or gifts” should be split 70% savings/debt reduction and 30% toward fun.
3. Not knowing the difference between a need and a want.
Your emergency fund is for just that, emergencies! An emergency is an unexpected expense that is a need and not a want. “It was on sale” is not an emergency.
4. Living on tomorrow’s income today.
Your total debt-to-income should be less than 36% of your gross income and your consumer debt – credit cards, autos, and merchant cards, for example – should be less than 20% of your net income.
Instead of living on tomorrow’s income today, work toward the goal of spending money you already have in the bank.
5. Buying too much house.
Add up the total cost of your principal, interest, taxes and insurance payments. This amount should be less than 28% of your gross income. Don’t buy too much house, you’ll regret it later. If you have too much house, either find ways to raise your income or find a different house that is more affordable.
6. Being on track to being IRA-rich and cash-poor.
Many people follow the advice of adding to their 401(k) and are on track to have a nice nest egg. However, they still live a paycheck-to-paycheck lifestyle because they have no taxable savings and an insufficient emergency fund. You need to have both taxable and tax-deferred savings.
7. Buying on credit.
How long will it really take to pay off loans and how much will it really cost? Making the minimum payments on a $10,000 credit card at 14% interest will take over 29 years to pay off and cost you $13,110 of interest for a total amount paid of $23,110.
Obviously, buying on credit is not a wise path to follow.
8. Not having an adequate long-term emergency fund.
If you have a dual-income household with similar incomes, you both work for different employers and neither of you is self-employed, you should have three months of living expenses in an emergency fund.
Everyone else who doesn’t fit the criteria above should have six months. If you spend $5,000 per month, this means you need $30,000 for your long-term emergency fund.
9. Not having regular financial meetings with yourself or your spouse.
You need to track your financial progress at least monthly and compare your progress to your current projections. The average American keeps their car for 42 months. They wash it, fill it with gas, and service it regularly. This car will lose approximately 15% of its value each year of ownership.
If you give this much attention to something that is losing you money, how much attention should you give to your money and investments? How long are you planning on keeping them?
10. Spreading yourself to thin.
Are you saving for retirement, adding money to an emergency fund, saving for your kids’ college expenses, paying extra on a home mortgage, and trying to pay off your car all at the same time?
Stop the madness! Focused efforts get rewarded.
Final Thoughts
Your homework is to write down some of the common budgeting mistakes that you might be making and correct them one at a time. Address your mistakes systematically, and you’ll find yourself making more progress than you can now imagine.
What are some other budgeting mistakes people might be making? Leave a comment!