Author: sherfdul45

Budgeting is essential for wise spending, for making sensible monetary decisions, and ultimately for being in control of your finances, yet when creating a budget, many people fall into one or many common budgeting pitfalls, which makes budgeting ineffective. 

Familiarizing yourself with some of these budgeting mistakes can create an awareness that will help you to stay on top of your budgeting goals. 

This article explores some of the frequent budgeting pitfalls and ways to avoid them.

1. Not Setting Realistic Goals

Creating a budget requires that you prioritize and budget for both short- and long-term budget goals; however, one of the common budgeting mistakes is when people set unrealistic budgeting goals. 

Some people attempt to save an overly ambitious amount, which they are unlikely to comply with each month without considering their expenses, while others may underestimate their needs.

Unrealistic goals can lead to frustration and cause you to abandon your budget entirely. To avoid this, set clear, achievable goals and adjust them as necessary.

2. Neglecting Irregular Expenses

Many budgets fail because they overlook irregular expenses, like car repairs, home maintenance, or annual insurance payments. 

These costs, while not monthly, are unavoidable and can disrupt finances if unplanned. Including a buffer for irregular expenses can prevent your budget from being derailed.

This helps you avoid reliance on credit cards or emergency funds when such expenses arise.

3. Failing to Track Your Spending

Another mistake is failing to monitor your daily or weekly spending habits. While you may have an outline for how much to spend in each category, tracking your expenses consistently is crucial. 

There are several budgeting apps that can help, or even just a weekly check-in with your receipts can make a big difference in maintaining your budget.

4. Not Adjusting for Income Changes

Budgeting based on an expected income level rather than actual income can lead to financial strain, especially for those with variable earnings, like freelancers or commission-based employees. 

If you experience a dip in income, adjusting your budget immediately to reflect the new reality is essential. For those with irregular income, budgeting with a lower estimate of average earnings can help you maintain financial stability.

5. Overlooking Small Purchases

It’s easy to ignore small, frequent purchases, such as coffee or snacks, but these can add up quickly. Failing to account for these expenses can lead to overspending. Allocating a reasonable amount for discretionary purchases and keeping track of them will help you avoid this mistake.

6. Not Saving for Emergencies

An emergency fund is a critical safety net for unexpected situations such as car breakdowns, yet many people neglect it when creating a budget. Without an emergency fund, any unexpected expense can lead to debt.

Setting aside a small portion of your income regularly, even if only a few dollars at a time, will build a financial cushion over time.

7. Failing to Review and Adjust the Budget Regularly

Life is dynamic, and so are our financial needs. A budget created months ago may no longer suit our current needs or goals. Failing to review and adjust your budget regularly can cause it to become ineffective. 

Regularly revisiting your budget allows you to adapt to changes in income, expenses, or goals, helping you stay on track.

8. Using Credit for Everyday Expenses

Using credit cards for everyday expenses can be tempting but can also lead to significant debt if not paid off in full each month. Relying on credit can mask overspending and eventually harm your financial health. Instead, allocate money for daily expenses within your budget and reserve credit cards for emergencies or planned, repayable expenses.

9. Not Prioritizing Debt Repayment

Ignoring debt repayment while budgeting is another common mistake of many. Interest on debt accumulates over time, making it harder to pay off. Allocating a portion of your income towards repaying debt—especially high-interest debt—can relieve you of financial pressure over time. 

Consider strategies like the debt snowball or avalanche method for an effective payoff approach.

Final Thoughts

Budgeting is a powerful tool for having complete control over your finances, but only when done thoughtfully and consistently. By avoiding some of the common budgeting mistakes and reviewing your budget periodically, you can set a strong foundation for managing your finances successfully. Remember, the goal is progress, not perfection—small, consistent steps make a big difference.

How much of your income do you spend or intend to spend on food or groceries? A simple budget could help you determine the amount of money you intend to spend on a particular item.

Having a detailed written plan on how you’re going to spend your income before you actually begin spending is one of the most effective ways to keep your expenses or finances in check. 

A financial budget allows you to do just that. It’s a blueprint detailing how much of your income you intend to spend on one thing and then another. 

For instance, if before spending you decide that you’re going  to spend $200 of your income on transportation and $50 dining out, you’ve in reality created a budget—a mental budget.

Having a budget or creating a working budget will help you avoid impulse purchases (the buying of things you didn’t plan or intend to). 

Budgeting will also help you track and manage your expenses, assist in reaching your savings goals, and ultimately help you be in control of your finances.

Whether you’re a novice looking for a quick guide on how to create a simple budget or a financially savvy person looking for ways to hone your budgeting skills, this article is written for you.

Below is a step-by-step guide for creating a working financial budget.

Get some budgeting tools first

You don’t need to spend money on budgeting tools if you choose not to; sometimes all you need is a spreadsheet program like Microsoft Excel or a pen and paper if you’re a Luddite—the traditional way. These simple tools will help you track both your expenses and income.

Create and password-protect a folder for budgeting and recording all your financial decisions; this is where you would keep your budget and review it from time to time. Moreover, all your financial goals, plans, or thoughts should be recorded in that folder.

You’ll need to create a section for recording all your income and daily or monthly expenses in the Excel program. Create labels for tracking your spending, income, or expenditure. If this is too much work for you, you can use any of the built-in budget templates in Excel. That should be fine.

Determine your net income

With your budgeting tools in place, your next step would be to determine your net income.

This is income after taxes and deductions, which includes insurance and retirement programs offered by your employer, just to mention a few.

You don’t want to use your overall income, as that will leave you thinking you have more money to spend. 

Using your overall income also encourages profligate spending; that’s why you would want to avoid it.

Use the same net income for all your income streams if you have diverse income sources.

And for freelancers, your net income will be income after all charges: taxes, charges from your bank account through which you receive remuneration from clients, etcetera.

Track your expenditure

What do you spend your money on? Knowing where your money is going is crucial for effective budgeting.

To determine where and what you spend your money on, you will need a one- to three-month track record of your expenses.

Or you can brainstorm what you spend your money on; the downside of this is that you won’t get accurate figures and estimates. I therefore encourage the former.

To track your expenses, either use a pen and paper or your spreadsheet program; open the program and label the month and date for each day and another label tagged “expenses or amount.”

Later, you can create a separate spreadsheet and categorize your expenses into home, transportation, groceries, entertainment, savings, etcetera. But at this stage, focus on getting all that you spend your money on without the categories.

Your expenses can be divided into fixed and variable expenditures.

Fixed expenses include car payments, rent, mortgages, and more, and variable expenditures include groceries, transportation costs, entertainment, etcetera. Record your daily expenses as well.

Set realistic financial goals

I will assume you have a record of all that you spend your money on; you know what you spend money on and where much of your money is spent. Moreover, you may now be conscious of unnecessary expenditures as well.

It’s now time to create a realistic goal; the key to creating and following a budget rigorously is to be realistic.

Your goal should be general and specific; for instance, you may want to save three months of emergency funds, cut out spending on entertainment or subscriptions, etcetera. Whatever your goal is, it should be realistic.

Your financial goals can be divided into short-term goals and long-term goals.

Short-term goals are those goals you need less time to achieve, say 1 to 3 years, for instance, creating an emergency fund, paying credit card debt, or paying a mortgage.

Long-term goals may take more than three years; for instance, saving to buy a new house or retirement savings. After determining your goals, the next step is to

Create your budget around your goals

A budget is actually a blueprint for how you’re going to spend your money before spending it. Your budget serves as a roadmap for reaching your financial decisions or goal.

The financial goals you create should not only be realistic but also hinge on your budget. 

Once you’ve created your budget around your goals, you may notice that, as the days go by, you may want to make changes to your goals. Yes, it’s necessary, and that leads us to the next point.

Periodically review your budget

A periodic review of your budget is indispensable for meeting your financial goals.

You may need to make changes to your budget as your priorities change or even recreate the budget because you’re unable to realistically achieve some plans or goals.

Whichever way, make sure you review or revisit your budget every so often to stay aware and on track.

Save and Invest

It can never go without pointing out that you’d need to budget for savings. Saving goals include an emergency fund, saving for vacation, debt payment or mortgage (maybe you want a new house), and more.

Make sure you have a separate account for each savings goal and also keep the savings in a high-yield account to get a good return on your money.

Even though saving is good, it’s even better when you invest your savings.

Choose less risky investment options, such as Treasury bills or fixed deposits, to get a good return on your investments.

If you have a higher risk tolerance, then you could opt for investment options such as stocks, ETFs, cryptocurrencies, and more.

In a Nutshell,

 A financial budget is a blueprint detailing how you’re going to spend your income before you are in a position to spend it.

Creating a simple budget and sticking to it will help you track your income and expenses, give you more control over your money, and help you reach your savings and investment goals.

With simple tools such as Excel or spreadsheet software, you can track your daily expenses and income, set financial goals, and create your budget around these goals.

Periodically reviewing your budget will help you stay on track, and by saving and investing part of your money, you’ll get a return on your investment and stay on top of your finances.

Frequently Asked Questions

 Are budgeting apps worth it?

Budgeting apps can offer you an easy way of tracking your daily finances, including spending and income.

For those who don’t have time to create a budget on their own, budgeting apps can help create one quickly without much effort.

How can I stick to a budget?

Creating a budget is not easy, but sticking to a budget is even more elusive. The key to following your budget is to be realistic.

Moreover, by being disciplined and consistently reviewing your budget, you can stick to it.

Further, consistently remind yourself of how your inability to stick to the budget can affect your finances, such as huge debt and an inability to cope with financial crises. This is the least said.

Do rich people budget their money?

Certainly, though many do this unconsciously, rich people are in control of their finances and make time to budget.

Some hire financial advisors to help them out.

Creating a realistic budget is an effective way to keep your finances in check and meet both short-term and long-term monetary goals. 

You’ll have more control over your money when you have a roadmap detailing how you’re going to spend.

Having a blueprint on how you’re going to spend your hard-earned income will help you avoid impulse buying and reckless spending.

But quite often, novice and seasoned individuals who seek to build good financial habits by learning to create a budget are confronted with the challenge of deciding what to include as expenses in their budget or what expenses make up a particular budget category.

Budget categories outline and put expenses into particular classes and what types of expenses make up that class. With your budget sorted into categories, you’ll be more organized and have clarity on your budget list.

This article aims at educating both novices and financial experts on budget categories and the expenses that make up each category.

Here is a list of 12 common budget categories to consider and the expenses that make up each category.

1.  Housing

Housing is a common budget category; whether you own a full-fledged flat or rent space, you can’t help but include it in your budget.

According to an economic release by the U.S. Bureau of Labor Statistics in September 2023, housing expenditure alone witnessed a spike in the average annual expenditure, accounting for 33% of the total. 

And more importantly, it was the highest, showing how significant and necessary housing is in budgeting.

If you’re a landlord, it includes all the costs you incur on your house to keep it in shape; an example is mortgage expenses.

If you rent a house, this is made up of all the expenses you must bear for renting the space, such as monthly rent, utility bills, etc.

Taxes levied on real estate properties such as houses, bare land, and commercial buildings by the local government make up your household expenditure.

All household repairs, such as painting and fixing broken or clogged pipes and windows, should be considered in the housing category. Others include HOA fees; there are more.

2.  Transportation

Transportation costs make up the total expenditure of the average American. Whereas most people own a car, the majority of the population owns more than one.

According to the U.S. Department of Transportation, the average American spends 16% of their income on transportation. You should therefore consider it in your budget.

Transportation costs include car payments, gas and tires, parking fees, maintenance, and general repair expenses.

3.  Food

As MFK Fisher said, “First we eat, and then we do everything else.”

As a necessity of life, food occupies the spectrum of monthly expenditure and should be included in your budget. Whether you cook by yourself as opposed to dining out, you have to eat and must pay for what you want inside your paunch.

Food expenditure covers groceries, purchases at restaurants, and food bought and provided for that cat or dog sitting in your house.

4.  Utilities

If you own or rent a house, you know that utilities like water, electricity, and garbage disposal services are indispensable for your well-being.

You need water for washing, electricity to run your electrical appliances, and the phone to call loved ones. All these must not be foregone when crafting your budget.

Utility costs include electricity, water, garbage, charges for phone usage, internet, and cables.

5.  Clothing

“Clothes,” Mark Twain said, “make us who we are.” Naked people have little or no influence on society.“ You wear clothes to grace several occasions or events; all these come with a cost, and you need to determine how much you’d spend on them.

Apparel costs include adult clothing, adult shoes, and children’s shoes and clothing.

6.  Medical or Health Care

They say, “Health is wealth.” Your health is a valuable commodity that should be taken care of. By taking prescribed medications and running regular checkups to see the condition of your health, you’re taking a step toward living a longer life.

But don’t forget, they come with a cost too and should be considered when creating your budget.

Health care expenditure involves primary care, medication or medical services, specialty care, and dental care.

All other health concerns and costs should be in this category.

7.  Household items

Household items or supplies like toiletries, laundry detergent, dishwasher detergent, and cleaning supplies or tools make up your daily expenses; hence, you should include them in your budget.

8.  Personal

Whether you hit the gym or have a decent haircut every month, or perhaps you spend your leisure time at the cinema with friends or loved ones, your personal care is important. And you must prioritize and determine how much you’ll spend on personal care.

Personal expenditures include gym memberships, haircuts, salon services, cosmetics, and Netflix subscriptions.

9.  Debt

Debt is described as something—more specifically, money—you owe someone that must be paid with or without interest. Depending on the amount and time agreed upon by the creditor and borrower, the interest on debt is usually a small percentage of the loaned amount.

Your interest can accumulate and become a sea of debt when not paid on time. This is why you must budget for every debt you owe and clear it.

You must budget for and pay all the money you owe your creditors, whether you borrowed to make a car purchase or to finance your college education.

Debt includes student loans, personal loans, and credit cards.

10.  Education

Education provides us with the opportunity to develop our potential and create job opportunities. As Nelson Mandela said, “Education is the most powerful weapon you can use to change the world.”

Children’s college, your college, school supplies, books, and the employment of private tutors come with a cost and make up your education expenditure.

11.  Savings

Savings and investing are good financial habits you will profit from. By budgeting for all your savings and investments, you’re creating a path for financial independence and freedom.

Some of the savings ’goals that could be budgeted for include an emergency fund, big purchases like a brand-new laptop or camera, and other savings goals.

12.  Gifts or Donations

No man is an island; we are surrounded by people who shape our lives. Friends, family, or relatives want us to show how much we love them by actions preferred to word of mouth on such occasions as wedding, birthdays, etc.

A gift or two can go a long way toward communicating how much we cherish people in our lives.

Hence, you should budget for birthdays, anniversaries, weddings, Christmas, special occasions, and gifts or donations to charities.

13.  Entertainment

If you remember that old school lyric, “All work and no play makes Jack a dull boy,” you would recognize the value of occasional and humble recreation or entertainment, which, like all other budget categories, comes with a cost.

Entertainment expenses include games, movies, concerts, vacations, and subscriptions (Amazon FBA, Netflix, etc.).

Overall

Creating a financial budget and sticking to it is a great way to keep your finances or expenses in check and is one of the paths towards financial independence. 

Organizing your budget into categories and subcategories such as household, education, food, entertainment, etc. provides you with more clarity.

Budget categories are many. By sorting out those categories above and employing those in line with your specific needs, you’ll be more organized in drawing and using an effective budget.