Nobody is born with the ability to ride a bike. Budgeting is no different. It's a skill that needs to be developed over time. Despite all good intentions, there are certain mistakes we can all make along the way. Whether you need to start budgeting now or are preparing to budget in the future, it's important to think about it as early as possible.
Here's some common mistakes that people make when budgeting and, importantly, some key ways to avoid making them.
1. Not having a goal in mind
Your budget should be used as a tool to help you achieve your financial goals. So it's important to set the goals first. Your budget needs to be shaped around those goals.
Having a goal can motivate you to be disciplined - whether that's means cooking that meal from home instead of ordering a takeaway, or maybe sacrificing buying unnecessary clothing for a while. Without something to aim for, it will be easier to splurge on things you really don’t need.
2. Not everything is a “need”
We can be our own worst enemies when it comes to budgeting. We see things we like and assume they are a "need" but in reality, we could live without them. Trying to keep up with appearances or follow the latest trends can also confuse us into thinking we have to buy things all the time.
It's important to be critical and ask yourself what would happen if you didn’t buy that thing? If you do need it, what would happen if you bought a cheaper version instead? These questions can help to avoid making poor choices.
3. It’s unrealistic
When creating your budget, don’t guess your costs and spending.
Do some research to find out how much things will cost. Check how much you're actually spending as well by looking at bank statements or receipts for things you've bought.
You may surprise yourself at how the smaller things add up. That TV subscription you might have could cost you over £120 per year! Unplanned supermarket trips can also add up too.
When you understand how much you spend and how much things cost, you can set a realistic budget.
4. It’s not automated
Let’s be honest. We all start out with good intentions of sticking to our newly created budget. But much like those New Year resolutions, they often don’t last long once our attention starts to drift over time.
If you have a bank account, downloading monthly bank statements can be really helpful. Alternatively, you can create a personalised spreadsheet to update your budget.
This manual process might not be for everyone though and most of us get bored of updating our budget each month. Luckily there’s more than enough assistance out there to do this work for us!
a. Use an app
Many banks have budgeting apps. They're often free. A lot of banks even automatically categorise your spending (for example splitting between entertainment and travel). The apps often allow you to create your own custom categories too.
These apps are often linked to your debit or credit cards, so the amount you spend will be updated automatically. You can take advantage of setting spending limits for overall spend. You can also limit your spending for certain categories (such as eating out) or with specific companies if you're a big spender at your favourite shop.
If you suffer from poor self-control, you can set hard limits that stop your card when you hit a pre-defined level of spending. Or, you could be a little kinder to yourself and just set up a notification.
b. Saving as a priority
Many people intend to put some savings aside at the end of the month, but then either forget or run out of money.
One of the reasons we don’t achieve our saving goals is that we don’t remove the one thing that is often the most inefficient part of the equation. Ourself.
Saving is an important part of being financially healthy and there's tools to help you do it.
Most banking apps allow you to set up an automatic payment into your chosen savings account on a specific date. So you can sit back and concentrate on every other part of your budget. If you don't have a bank account, you can set monthly reminders to put some money aside before you treat yourself.
5. Don’t just let life go by
It’s easy to get caught up with making a super-strict budget. You might end up losing motivation if it’s too restrictive though.
You might have to make some sacrifices in some places, but always try to leave a little room for a treat. Frequent gym-goers will factor in a cheat day into their routine and you can consider doing the same in your budget (within reason!).
6. Not having an emergency fund
Imagine that you’ve gone to all that hard work sticking to your budget for the month, then an unexpected cost comes. That can be a blow to the budget.
That’s why an emergency pot of money is essential. This buffer can help with unexpected costs. After all, unexpected costs always seem to find a way of occurring at the worst possible time!
A common goal is to save at least 3 months’ worth of bills and essential costs in your emergency fund. For example, if your rent/mortgage, utility bills and other costs totalled £1500 each month, then it's good to have at least £4500 put aside.
Remember, it's a journey
Budgeting is a life-skill and - just like anything - the more you practise, the better you'll get.
There's lots of banks, apps and online resources that can help you to live within your means and reach your financial goal.
This article is for information purposes only. It is not intended to be used as financial advice. You should seek specialist advice from your bank or a qualified Financial Advisor before making any financial decisions.