Big Budgeting Mistakes and How to Fix Them When They Happen to You
It’s the middle of a pay period, and everything is going well until you open your inbox, and there it is, a notice for a bill. You thought you paid it, so why does the email suggest otherwise?! After some frantic digging and a phone call, you confirm the bill remains unpaid, and you don’t have enough funds available to cover it.
Our finances and life have a funny way of getting us into tight spots, usually when we least expect it and certainly when we haven’t planned for it. If this sounds like you, you’re not alone. According to Debt dot com, 80% of Americans have a budget today, but that still leaves the remaining 20% without a budget.
Even if you do have a budget, it’s easy to get off track. Correcting mistakes isn’t easy, and it takes time, but you can improve to come out ahead in the future. Here are five big budgeting mistakes and ways you can fix them.
Not Following a Budget
There are dangers to not following a budget, including running out of cash between pay periods, overspending in one or more areas, or incurring an unexpected expense that you can’t cover. Since the start of the pandemic, more people have been budgeting their finances than before, but 20% of Americans have not yet begun this habit, and that number was 12% higher two years ago.
There are two main ways Americans are budgeting today.
- Pen and paper
- Budgeting apps
You’ll find advocates for each method, so go with the technique that makes the most sense for you. For some, writing something down is easier and reinforces knowledge and action. For others, budgeting apps can make tracking your spending a breeze, especially when you’re mobile. If a budgeting app sounds like a good fit for you, check out Extraco’s eBank app in the mobile store. It offers a budget tracker as one of its many features to help you stay on top of your finances.
No Emergency Savings in Place
Starting with a budget is a great idea, but don’t stop there. A recent Bankrate survey revealed that 51% of Americans still cannot cover three months of expenses with their emergency funds, and 25% of Americans have no emergency fund at all.
We’ve already witnessed the impact of joblessness throughout the pandemic. Not only did the pandemic restrictions force Americans out of work, but many were never able to return to work due to permanent closures, restructuring, and other types of job loss. It’s in times like these that a fully-funded emergency account could save the day, week, month, or even the year.
Financial guru Dave Ramsey suggests starting small with baby steps. If you count yourself among the 25% of Americans who don’t have an emergency fund, then begin by saving an initial $1,000, but don’t stop there. Assuming you’ve paid your debts, keep saving until you’ve achieved 3-6 months of living expenses in your emergency account.
For some, you might want to aim higher. If your income is unstable, you or your spouse are living with a disability, or during economic uncertainty, you might want to consider further bumping your emergency savings to cover 9-12 months of living expenses.
Overspending on Non-Essentials
Cutting back on the non-essentials is another excellent way to preserve your budget and increase your cash reserves. That doesn’t mean you can’t enjoy that occasional large, cold brew caramel latte with sweet cream – or whatever your guilty pleasure is. However, it does mean that you should be aware of how much you’re spending and find ways to cut back on non-essential items.
One coffee shop cup of “Joe” can easily set you back $3 to $6 and sometimes more, depending on your order. If you buy your coffee every day before work, you could easily find yourself spending $15 to $30 per week or $60 to $120 per month.
A better option is to plan for your guilty pleasures and include them in your monthly budget. Instead of heading to the coffee shop daily, treat yourself once a week and take your home-brewed coffee the rest of the time. Doing so could save you about $100 per month.
Ignoring Your Credit Report
Another big mistake is ignoring your credit report. Your credit report does many things. First, if you need a loan, such as a mortgage, a personal loan, or a car loan, then your lender will not decide without initially reviewing your credit report. It’s not just your score that helps determine lending decisions, either.
How much debt you have compared to your income also plays into lending considerations, that’s especially important if you plan to buy a house. A high debt-to-income ratio can lead to higher interest rates, which means more money out of your pocket over the term of your loan. If your debt-to-income is too high, it may disqualify you from any lending.
One way to combat debt and improve your credit history and score is to pay down your outstanding debt. A popular strategy for doing this is via the snowball method, which has you list all your debts in order from the least amount to the greatest and pay them off in this exact order. As you pay off debt, your debt-to-income ratio will decrease, and your credit score will increase.
Lack of Financial Transparency with Your Partner
The American Institute of Certified Public Accountants recently reported that 7 in 10 married or cohabitating Americans cite financial stress as a cause of disagreements with their significant other. Two of the top issues include spending priorities and lack of financial transparency.
Getting on the same page with your partner is essential for many areas of life, and that’s especially true when it comes to finances. It’s good to have a plan, but if you’re in a cohabitating relationship, make sure you and your significant other share household financial discussions. Open communication promotes understanding, and compromise helps reduce some of those relationship tensions.
The Final Word
Despite the pitfalls mentioned above, there are ways to overcome some of the biggest budgeting mistakes, even if they happen to you, but to do so often requires embracing change designed to provide you and your family with a brighter, less stressful future. Are you ready to make that change?