San Diego Financial Literacy Center

Common Budgeting Mistakes and How to Correct Them

If you’re drowning in credit card debt and are having a hard time saving, take a step back and look at your day-to-day spending habits and then re-assess them. Knowing your weaknesses could help prevent you from falling further into debt and show you a light at the end of the tunnel.

Chase Peckham, Director of Community Outreach at the San Diego Financial Literacy Center, says, “Consumers who are living with debt or who have a hard time saving often make very common financial missteps, most of which they can overcome with discipline and spending behavior changes.”

Here are some of the most common mistakes people make while trying to put together budgets:

  1. Thinking of Budget as a Four Letter Word – To some people, it is a four letter word, but in reality, everyone can benefit from analyzing what they spend their money on, seeing how much they should spend, and then sticking to that amount. It also makes sense to budget for known future expenses: retirement, kids’ college, vacations, etc. Not saving income in advance means you’ll have to use credit cards or dip into funds set aside for necessities.

A plan: To find out where your money is actually being spent, keep track of where it goes for a month. Save receipts and enter this information into a spreadsheet or financial software. You can even use a plain old pen and paper to categorize your expenses. This will reveal whether you’re spending too much on things that you want versus what you need, such as lunches out with friends versus gasoline for your car. This doesn’t mean that you have to give up everything that you enjoy, just that you can control how often you’re doing them. Allot amounts for each item and adjust as necessary.

  1. Not Planning for Yearly ExpensesYou plan for recurring bills and expenses: groceries, utilities, and gasoline. But, you might forget about yearly expenses, like car insurance and property taxes.

A Plan: For planning purposes, simply divide yearly lump sums by 12 and allocate that amount for annual expenses every month. Yes, it’s easy to forget about bills that don’t show up at your door every month, but you’re probably better off paying the total bill at once, since most companies levy an extra charge for monthly payments. Remember to also plan for other non-monthly expenses, like school supplies, pet care, and gifts.

  1. Not Tracking Past/ Current ExpensesA good way to get a handle on irregular expenses is to look at past expenses. These are usually things that we forget about that can get us into trouble as the year goes on.

A Plan: How often you went to the doctor or mechanic this year can indicate how much you’ll go next year. Plus, some costs are seasonal. Gas and oil bills are higher in the winter, and electric bills are frequently higher in the summer when air conditioners run.

  1. Not Being FlexibleYou don’t have to be too crazy with following the budget to a “T.” Things will happen that can throw your budget a little out of whack. It’s called life! We need to be somewhat flexible with the budget and be able to move things around from time to time.

A Plan: Mix things up. For instance, spend less on eating out in one month and buy some new clothes the next. Sometimes you have to reward yourself, so make decisions that are best for you and your family.

  1. Procrastinating on Creating an Emergency FundLearn to save for financial emergencies. A trip to the emergency room or a car accident could force you to put large balances on credit cards, causing interest to accrue and more debt to pile up. For instance, if your tire goes flat, and you can’t pay upfront for the replacement, you’re stuck charging it or reducing funds earmarked for necessities. Emergency funds are essential.

A Plan: The general rule is to maintain an emergency fund of at least three-to-six months’ worth of living expenses, and to keep your insurance policies up to date. Work toward that goal by putting away ten percent of your take-home pay each month in a liquid savings account. If you receive a raise or bonus, add that money to savings. Since you’re not used to the extra cash flow, you won’t miss it.

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