What are the top 5 mistakes when creating a budget?

Range Certified Financial Planner
Range Certified Financial Planner
March 31, 2022

If the word budget makes you squirm, you’re not alone. Budgeting can feel restrictive, causing many to avoid budgeting altogether. Unfortunately, this can lead to poor financial outcomes because without a budget, it’s hard to know where your money is going.

Dr. Brad Klontz, a certified financial planner and psychologist, says, “Your emotional brain responds to the word budget the same way it responds to the word diet. The connotation is deprivation, suffering, agony, depression.”

However, a budget is simply a tool you can use to tell your money where to go rather than wonder where it all went. A budget allows you to align your money and goals, intentionally allocating your income to achieve financial success. Read on to learn common budgeting mistakes and how to avoid them.

The Top 5 Mistakes People Make When Creating a Budget

1. They avoid budgeting altogether.

The biggest mistake you can make with your budget is not having one. Without a budget, it’s very difficult to know how much you’re spending, and in turn, it becomes difficult to save and invest for the future. With 64% of the US population living paycheck to paycheck, and 40% unable to cover a $400 expense, budgeting is more important now than ever.

When asked why they don’t budget, many people say they don’t know how, are bad at math, or don’t think they make enough money to budget. While these can all feel like valid reasons, the truth is anyone can create a budget, and everyone should, regardless of income.

Also, if you’re fortunate to have a high-paying job or career, with a surplus of income above your expenses, a budget can help you take your financial situation to the next level. So don’t make the mistake of not having a budget—get started today and begin aligning your money with your values.

2. They eliminate all of their “fun” spending.

A significant reason budgets fail is because they’re often focused entirely on needs, eliminating all wants. It is a common issue, and it makes sense—as people review their budget and decide where to cut back, the “fun” or “wants” category seems like the obvious choice. While that may work for a month or two, the truth is, it’s simply unsustainable. Fun and enjoyment are an essential part of a well-lived life, and it is unrealistic to cut your fun category out completely.

Instead, leave some fun spending in your budget, and focus on other ways to cut back or increase your income. By making sure fun makes the final cut, you will be more likely to embrace your budget, as it will better represent your ideal life.

3. They are too strict and inflexible.

A common mistake people make when budgeting is they become too rigid or attached to the specifics of the budget. Then, when things don’t go according to plan—an inevitable part of life—they feel like their budget has failed, and they’re more likely to abandon it altogether.

Instead, try viewing your budget as a living, breathing document that is flexible and open to change. If you overspend in one category, don’t toss the budget out the window and deem yourself a failure. Instead, simply look around at the rest of your budget, and see where you could spend a little less that month to balance it out.

4. They forget to budget for the irregular or unexpected.

People often forget to pencil in the irregular or unexpected expenses when designing their budget. This can cause them to go over budget each month and lead to unnecessary frustration and financial struggle.

Irregular expenses are the infrequent, but often predictable, expenses you may have. A couple of examples include semi-annual or annual insurance payments, childcare or babysitters, home repairs, haircuts, vehicle registrations, health expenses, gifts for friends and family, and more. The best way to budget for these expenses is to tally them up and divide them by 12. Then, if you find that you’re still under budgeting, consider adding an extra 10% to the total to create a buffer.

Unexpected expenses are emergencies or unanticipated expenses that can come out of nowhere. These include emergency car or home repairs, unplanned medical costs, etc. If you have an emergency fund, using it to cover these expenses may be a good fit. If you don’t, consider establishing a 3 to 6-month emergency fund and adding a line item in your budget to begin saving.

5. They fail to negotiate or price shop their “fixed” costs.

Another mistake people make when budgeting is they view their fixed costs as unchangeable, never bothering to negotiate with their providers for a better deal. This can leave hundreds if not thousands of dollars on the table each year—real money you could use in other areas of your life.

A few of the not-so-fixed expenses to consider negotiating are annual credit card fees, internet and cable packages, cell phone bills, and insurance costs.

Often, the only thing standing between you and a better monthly price is a phone call to the provider. First, simply let them know you’ve been shopping around, considering other providers, and have found some great deals. Next, let them know you’re interested in remaining a customer, but you’ll need a better price. Then wait, allowing them to offer their best deal available.

Other times, getting the best deal may mean switching providers altogether. As a rule of thumb, consider shopping insurance providers every 1-2 years to make sure you’re getting the best deal. A great place to look is on Policygenius, an insurance aggregator that lets multiple companies compete for your business, bringing you the best deals available.

When it comes to your cell phone plan, consider using a budget carrier like Mint Mobile or Google Fi. Depending on your location, your connection may be comparable with the big-name carriers at a fraction of the cost.

Remember, don’t be afraid to negotiate, ask for a discount, and switch providers. Every dollar you save can go towards something you enjoy spending money on, a win-win.

Range is here to help.

With Range, you can connect all your finances into a single dashboard to track, monitor and plan the best version of your life. Say goodbye to middlemen and spreadsheets and hello to the new financial you.

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