17 budgeting mistakes you're making

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Budgeting can provide an accurate picture of your personal finances, and it's the perfect tool for deciding how to spend your money. But a budget is only as good as your strategy, and if you don't have much guidance, you might make a few errors.

Your budget doesn't have to be perfect to work, but you'll need to recognize common mistakes that can throw your spending plan off balance. Here's a look at 17 of the biggest budgeting mistakes you're making.

1. Estimating How Much You Spend

Before you can create a budget, you have to know where your money goes and your true cost-of-living expenses. Estimating or guessing your expenses isn't going to work because you're likely spending more than you think each month.

"It's a good idea to track your spending for a month or two before you try to come up with a budget," said Barry Choi, personal finance expert at Money We Have. "Make a log of everything you spend money on, this way you can see where your money is going and then come up with a realistic budget."

2. Forgetting to Save for the Unexpected

A budget isn't only useful for managing bills— it's also a tool to help grow your personal savings. As you create a budget for fixed and variable expenses, don't forget to pay yourself. Treat your savings account like any other expense in your budget and you'll slowly grow a rainy day fund.

"Something always comes up that is outside of your budget," said Pamela Capalad, owner of the financial planning company Brunch & Budget. "As a solution, I have clients open a 'Now Fund' which is essentially a savings account where they put away a set amount of money every month for unexpected purchases."

3. Unrealistic Expectations

You might be eager to improve your financial outlook, but you shouldn't set your standards too high. Extreme budgeting looks good on paper, yet this approach isn't always effective or realistic.

"Novice budgeters, especially those trying to pay off credit card debt, often get the numbers to add up on paper but they have no basis in reality," said Stephanie Genkin, a financial planner in Brooklyn, N.Y. "I look at these budgets and ask these folks, are you really going to stop eating lunch out EVERY day when previously you were always eating out?"

Instead, Genkin suggests starting small with baby steps, perhaps packing your lunch twice a week and gradually adding an extra day until you're no longer eating out five days a week.

4. Budgeting Based on Your Gross Income

You might earn $40,000 a year, but after taxes, health insurance and other payroll deductions, your actual earnings are much less. For a realistic budget, you'll need to create a spending plan based on your net or take-home pay.

5. Not Considering Cheaper Alternatives

Lowering expenses is one way to keep costs within budget, but you might feel like there's little you can do about the cost of utilities. However, utility rates aren't set in stone, and you have more options than you realize.

Money-saving expert Andrea Woroch recommends reviewing monthly utility bills and looking for ways to save, such as searching for new providers and comparing rates, or speaking with a retention specialist to see if you're eligible for a discount or special promotion. The company might lower your rate to retain your business.

6. Too Many Financial Accounts

If you have a handful of credit cards and multiple checking accounts, it's easy to lose track of how you're spending your cash. Woroch suggests simplifying and streamlining all your accounts.

"With so many store cards and credit cards, you won't be able to track spending nor stay on top of payments which can lead to costly disasters, including credit score damage, late fees, revolving balances and overspending," Woroch said.

7. Buying Too Much House

Most people wouldn't dare walk away from their dream homes, but buying more house than you can afford is a budget killer. If you're creating a budget and discover that your mortgage or rent payment is the underlying cause of financial anxiety, it might be time to downsize and move into something cheaper.

8. Spreading Yourself Too Thin

Whether it's paying off debt, building an emergency fund, saving for a vacation or helping a relative financially, it only makes sense to include these expenses in a budget. But your cash only goes so far, and saving for multiple goals simultaneously or taking on too many responsibilities might be unrealistic and unnecessarily strain your budget.

9. Never Adjusting Your Variable Expenses

Budgeting doesn't work unless you're willing to change your spending pattern, if needed. If an assessment of your expenditures reveals you're spending too much on categories like entertainment, shopping and recreation, you'll need to make adjustments or else you'll continue to overspend each month.

10. Never Updating Your Budget

Your income and expenses can change from year to year. Therefore, the budget you create today might be irrelevant this time next year.

"Costs change all the time so avoid any cash flow problems by updating your budget on a regular basis," Choi said. "Don't forget to add any increases to your income."

11. Choosing the Wrong Budgeting Software

Between computer software programs, apps and websites, there's no shortage of helpful budgeting tools. Just know that a budgeting tracking system that works for one person might not work for you.

You have to compare available options and choose a program you're comfortable using.

"About 3/4 of the clients I see actually hate Mint.com," Capalad said. "But often it's the one they've heard of, so they try it and then forget about it. It's all about experimenting with and finding a tracking system you can see yourself using day to day."

12. Trying to Keep Up With Friends

The reality is, your peers might not share your financial mind-set or be as budget-conscious as you, which can stall your progress.

"In an effort to keep up with your spendy friends, you may be blowing more money than you should," said Avery Breyer, best-selling author of "Smart Money Blueprint: How to Stop Living Paycheck to Paycheck."

This doesn't mean cutting these people completely out of your life, but be conscious of who you shop with.

13. Dictating the Family Budget

In the case of couples, one person shouldn't dictate or control the family budget or household funds. A budget is only effective when both parties communicate and agree on the terms.

14. Forgetting About Irregular Expenses

It's good that you're budgeting for unexpected expenses like gifts, car repairs and home repairs, but you'll also need to budget for irregular expenses, such as annual insurance payments and tax payments.

"I try building those expenses into my budget by estimating the annual cost, then dividing by twelve," said Stefanie O'Connell, millennial finance expert and founder of The Broke and Beautiful Life.

15. Stealing Funds From Other Categories

As tempting as it might be, don't dip or steal cash from other spending categories. For example, if you've already spent your recreation or shopping budget for the month, don't take money from your grocery or transportation fund just because there's a sale at the mall.

16. Depriving Yourself of Fun Money

Getting serious about your money and spending less doesn't mean you have to sit at home bored. Everyone needs to blow off steam from time to time, and having a little fun with your money isn't irresponsible.


17. Thinking You Don't Need a Budget

If you never take time to actually sit down and write out a weekly or monthly budget, don't expect your personal finances to improve.

Fixing your financial outlook takes effort and work. It isn't enough to say you want change; you have to take the first step.

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This article was written by Valencia Higuera from The Motley Fool and was licensed as an article reprint. Article copyright May 1, 2015 by The Motley Fool.
The third party provider of the reprint permission and Fidelity Investments are independent entities and not legally affiliated.
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