By As a volunteer “budget coach,” I have analysed many people’s budgets over the years. People’s salaries, fixed expenses, priorities, and other factors vary, no two are precisely alike. That is to be expected. Budgeting is not one-size-fits-all.
However, certain budgeting practices make cash flow management easier and more productive regardless of your specific circumstances. Unfortunately, these approaches are used far too rarely. As a result, I’ve compiled a list of the five most typical financial blunders I notice.
1. Not budgeting according to gross income.
It is rather typical to discover budget advice based on net income — what remains after all withholding (for taxes) and transfers (for retirement plan contributions) have been deducted. The thinking is that net income is the money you have available, so you should base your budget on it.
Gross income, on the other hand, provides the most accurate and comprehensive picture of your earnings. I prefer to utilise it as a starting point because some of the withholding and transfer categories are easily handled.
Take taxes as an example. Approximately 80% of filers received a federal tax refund this year, with the average amount being $2,851. That’s a lot of money you might have chosen to take home with your pay cheque. If you regularly receive a large refund, use the IRS withholding calculator to see how much you should have withheld. You should also speak with your HR department about having less withheld.
Retirement contributions are also manageable. Listing how much you contribute each month can be a good reminder to consider if you’re contributing enough. Today, when so many workplace plans automatically set employee contribution levels — with the default amount typically set at a modest 3% of salary — it’s critical to assess if that’s sufficient.
2. Failure to prioritise tasks.
Budgeting entails more than simply recording your monthly income and expenses. It is about managing your money in a way that allows you to live within your means and pursue the objectives that are most important to you.
One reason so many people struggle to build an emergency fund or invest for the future is that they have not prioritised those goals. It is quite beneficial to plan your budget with saving, investing, and, if relevant to you, giving at the top of the outgoings column.
List them first on your budget, then subtract them from your income before allocating funds for housing, transportation, clothing, and other expenses. Trying to meet these priorities with money left over from lifestyle expenditure generally results in little to save, invest, or contribute.
3. Not budgeting for home and auto maintenance.
One of the most effective strategies to reduce your overall housing and transportation expenditures is to maintain your home and vehicle and make repairs on schedule. This will be much easier if you allocate money for these purposes in your monthly budget.
When it comes to homeownership, there always seems to be something that has to be fixed, whether it’s a squeaky door, a leaking faucet, or a furnace that won’t ignite. Depending on the age and condition of your property, $200 per month is a reasonable amount to budget for maintenance and repairs. If you buy a condo or townhouse, you should be able to spend less money. Make sure you understand your own responsibilities as well as those of your association.
With automobiles, $75 per car each month is reasonable, but it all depends on the state of your vehicle.
You won’t spend these sums every month, but there will be months when you spend significantly more. During months when you don’t spend your entire home or vehicle maintenance and repair allowance, don’t spend it on anything else. Allow it to accumulate, either in your checking account or in a savings account allocated for regular payments and expenses.
4. Not planning for regular payments and expenses.
When my family lived in the Chicago region, I will never forget the first property tax bill we received. I suspected one of our children had been stolen, and this was a ransom demand. The property taxes in Chicago are exceedingly hefty.
That is an example of a periodic charge or expense—a cost that does not occur every month but must be paid at some time during the year. If you don’t budget for these large, irregular expenses, they can be a major drain on your finances. Other examples are insurance premiums, year-end holiday gifts, and vacations.
Here’s what to do. Incorporate one-twelfth of the annual cost of each such item into your monthly budget. Then transfer the sum of all of these monthly amounts to a savings account designated for these expenses. That way, when the bill comes due, there will be funds set aside for it.
5. Not budgeting for miscellaneous expenses.
Maintaining a zero-based budget is an admirable objective. This signifies that income minus expenses equals zero. However, constructing a budget in which every dollar of revenue is allocated to a certain outgoing area is significantly easier than sticking to it. Regardless of how precise your strategy is, some expenses always seem to go outside of one of your preplanned categories.
To cope, create a monthly budget for miscellaneous spending. But not much – $50 is a reasonable limit. If miscellaneous items begin to exceed that amount, determine whether some of those expenses are sufficiently similar to warrant their own category.
There might be several hassles when using a budget, especially if you’re new to it. Avoiding these five typical budgeting blunders will help you remain on track and reduce aggravation.
