Remember one of our favorite posts about how nerdy we really might be here at Great Basin? Well, we’re about to get a little nerdier, folks. Our friends at NerdWallet have decided to contribute their awesome articles to our blog every month! They are all about helping us consumers save money and use our money wisely, and we like that. We hope you do, too!
Creating a household budget is one of the best ways to keep your personal finances organized. Whether you’re pursuing a particular financial goal or simply want to save for retirement, budgeting can be a fairly simple way to develop a stronger grasp of your personal finances. However, a few common budgeting pitfalls can hinder your financial goals and give you an incomplete picture of your household’s financial situation. Consider some of these solutions to common budgeting mistakes and you’ll be on your way to financial freedom.
Failing to stick to your system
If you fail to honestly record your spending habits or don’t utilize a bookkeeping system, the point of making a budget is completely lost. When utility bills are getting mixed up with grocery bills and credit card payments are in the same shoebox as last year’s tax information, it’s time to set up a new system – then stick with it.
An array of bookkeeping and recordkeeping software is available for a variety of platforms – even mobile devices – and can help you organize what you’re spending, when you are spending it, and can give you insight on how to change your financial behavior more efficiently. Consider giving software like Quickbooks for PCs a shot. Smartphone users should check out one of the many free or inexpensive money management apps.
Lack of savings
Those who have failed to start even a modest savings account or emergency fund are seriously at risk for financial disaster. A lack of savings indicates either spending too much or not making a habit of putting something away to effectively deal with unforeseen events. A traditional method is to put aside at least 10 percent of your annual earnings, but if you can’t afford to save that much, don’t be discouraged – even 5 or 3 percent is better than nothing.
Once you get started, a solid budget will help you grow your savings by cutting back on unnecessary spending and timing the expenditures of things effectively. Setting up automatic transfers from your checking account into your savings account, money market fund or any other extra savings vehicle you use to build your emergency fund is one of the best ways to save.
Are you budgeting $250 each month for groceries but only spending $130 – or worse yet, vice versa? Allocating the exact amount of money for each monthly or quarterly cost is key to budgeting effectively, and you can get a close estimate of your regular expenses by taking a look at your bank statements from the last several months. It’s important not to lose touch with reality when creating a budget, and allocating too much or too little for some things can be detrimental to your financial planning.
Go back through your debit card purchases to figure out how much you’re spending on bills, groceries and entertainment. It’s easy to use your credit union’s online banking service for assistance. This practice can give you a better understanding of your financial reality and will ultimately illuminate what you need to change in your monthly budget in order to save, spend and invest efficiently.
We all do it from time to time, but if you regularly make impulsive purchases as soon as you receive a paycheck, budgeting won’t do much for your financial organization strategy. In fact, a solid budget will include room for impulse buying that anticipates anything from a small coffee before commuting to work to a new pair of headphones to make a long trip more tolerable. These quick, unforeseen costs should be built in to a budget but never paid for with an emergency fund or the part of your budget allocated for other important costs.
Examine your spending history and find the things you know you really didn’t need, but bought anyway. This could have been a better smartphone, an extra dinner out, a computer bag or a wardrobe update – anything you know you could have done without. Total up these costs and see what percentage of your monthly income they represent. If you want to save in a dramatic way, take that percentage, spend 30% to 50% less of it and place the balance in a savings account.
Forgetting to plan for future costs
If you plan for your children to go to college in three years, your budget should reflect that future cost. Your budget works best when you can successfully anticipate large expenditures such as the purchase of a home, automobile or college education. By predicting these major – but foreseeable – expenses a few years prior, you’re less likely to be caught off guard when the time comes to foot the bill.
Good luck with your budgets! We’re always here to help. And NerdWallet will continue to share their super helpful knowledge with us every month, so be on the lookout for their next topic in December!Share: