Although you may be able to get by for now in spite of this budgeting pitfall, you are not going to move forward if you don’t set up a budget. If, as is the case for some savers, the thought of itemizing a laundry list of monthly expenses is preventing you from starting a budget, focus on one or two spending categories in your first budget to keep it simple. But when you create your first budget, you might not know how much to assign to the different spending categories in your budget, such as housing, transportation, and food. As a result, you might make the typical budgeting error of resorting to guesswork to estimate your monthly expenses, which can cause you to drastically underestimate or overestimate your expenditures. For example, let’s say that you allocate $200 for groceries when you typically spend around $500 per month. Cutting back $300 on food will likely set your budget up for failure. Instead of playing the guessing game, track all of your spending in various categories for a month and use the totals as a baseline when you set up your budget. Over the next few months, cut back on spending gradually. Instead of allocating an entire paycheck to your largest expense and leaving no money for other spending categories, set aside money from each paycheck to cover multiple expense categories. For example, if you adopt the 50/30/20 budgeting rule, allocate 50% of your paycheck to housing expenses and other “needs,” 30% to “wants” like vacations, and 20% to savings and debt payments. You can also save up a month of income and use that for your monthly budget, and then put aside what you earn this month to pay for next month’s bills. This process makes budgeting easier and helps prevent periodic cash flow problems that can force you to cut spending in vital categories like groceries or even make late payments on bills. The key is to find an expense-tracking method that works for you, be it a spreadsheet, software, or old-fashioned pen and paper. Once you start to track your spending, you can keep yourself accountable to stay on budget and can identify typical budgeting errors such as overspending and correct the behaviors that cause them. No matter how small it is or how seldomly you incur an expense, if you have not planned for it, you have made a money mistake that can throw off your budget in the month you eventually pay for it. To budget for irregular expenses like car insurance, divide the amount that you typically pay by 12 and then set aside that money each month in your budget. Likewise, include small, frequently forgotten budget items. After a few months of budgeting, you should be able to identify any expenses that you are missing and can tweak your budget for the next month accordingly. You and your partner should openly discuss where you are financially and where you want to be on a regular basis and work together on your budget. This will prevent you from overspending and will keep you on track to meet individual and joint financial goals. If you don’t have this financial safety net to fall back on, you risk having to dip into your long-term savings to cover your expenses, or worse, to spend on credit and potentially go deep into debt. If you maintain an emergency fund, you can draw from the fund when the need arises and then replenish it so that it’s there when you need it next. But like any other financial goal, you have to budget for it. While you’re building an emergency fund, include the monthly amount you plan to contribute to the fund as a fixed expense in the saving category of your budget. This approach will hold you accountable for saving and keep you on track to build an emergency fund that meets your needs. Misclassifying wants as needs or lumping them into the same spending category in your budget can be financially perilous because you’re unlikely to cut back on spending on needs as much as wants. To avoid this pitfall of budgeting, examine each of the items you regard as needs and ask yourself whether you could lead your life without it. If the answer is “yes,” that item is a non-essential expense and should be classified as a want. This is a typical budgeting error that can cause you to stick with overpriced service providers year after year and wind up with budget bloat. If your service provider is stellar, consider downgrading to a more affordable plan or even calling in and attempting to secure a lower monthly price. If you’re ready to move on, shop the competition for everything from insurance to your cable provider and gym to get the best bang for your buck. Doing so could trim your budget by tens or hundreds of dollars each month.
