10 Budgeting Pitfalls and How to Avoid Them

Many people give up on budgeting and return to negative spending habits if they can't make their budget work or stick to it. Often, difficulties stem from budgeting pitfalls and money misconceptions that can derail your monthly spending plan. Fortunately, a budget is a living document, so it's never too late to fix it to make it work for you. If you are making any of these 10 typical budgeting errors, learn how to avoid them in next month's budget so that you can retake control of your spending.

Not Having One

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The greatest financial misstep you can make is to spend without a budget. If you don’t establish a plan for how to spend your money every month, you are likely living in between financial crises, or at the very least, overspending in a way that could eventually put you in debt. In addition, you probably aren’t saving for important financial goals, such as saving for a home or retirement.

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.

Guessing at Monthly Costs

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You must assess your total monthly income and expenses in various categories to develop a monthly budget that allows you to live within your means.

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.

Assigning Expenses by Paycheck

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If you're paid weekly or biweekly, you may be assigning particular expenses to each paycheck. This budgeting pitfall might mean that the week when you pay your mortgage or rent, money is tight, especially if most of your bills are due at the same time.

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.

Not Tracking Your Spending

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Monitoring your spending involves recording your expenses throughout the month, preferably daily. If you don't track your spending, you risk overspending and prematurely blowing your budget or spending too little and failing to meet financial goals like debt repayment. The reason: If you don't know what you have spent, you won't know when you have reached your limit.

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.

If you can't manage your cash throughout the month, consider using the envelope system of budgeting whereby you divide cash for spending into multiple envelopes that are each intended for use on a specific spending category.

Leaving Out Items

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Another typical error that people make is to fail to include all of their expected expenses in their budget. For example, you might leave out small recurring expenses, such as your daily ride on the subway, or even large one-time expenses like wedding and holiday gifts.

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.

Not Working as a Team

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One of the biggest pitfalls of budgeting for couples to avoid is spending in a silo. For example, if you and your spouse both spend in the same category at the same time of the month, your combined spending might exceed what you planned to spend in that category and unwittingly blow your budget. Or, one spouse might fail to consider the unique financial needs and wants of the other (the desire to pay down debt or save for a vacation, for example). This practice can lead both individuals to eventually abandon the budget.

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.

Not Having an Emergency Fund

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An emergency fund is a pool of money that you use to pay for unplanned expenses like surprise medical bills or sudden home repairs. Ideally, the fund should amount to three to six months of living expenses.

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.

Not Budgeting for Fun

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Depriving yourself of all entertainment spending is a budgeting pitfall that makes it more likely that you will blow your spending plan for the month. Catching a movie, seeing your favorite performer in concert, and even occasional shopping splurges are all within bounds, as long as you put them in your budget each month and stick to the amount that you planned to spend. Otherwise, you might end up spending more than you would have if you had never set up the restrictions.

Classifying Wants as Needs

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Another typical error that individuals make in their budget is to classify "wants," which are non-essential expenses like personal travel or eating out, with "needs," which are essential expenditures such as mortgage payments and groceries.

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.

Assuming Your Monthly Bills Are Set

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Many people view fixed expenses as​ non-negotiable budget items. For example, your cable or cell phone bill may be the same amount each month. As a result, when looking at your budget, you might not look for opportunities to reduce common expenses.

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.

Article Sources

  1. Consumer.gov. "Making a Budget." Accessed April 8, 2020.

  2. Bank of America. "5 Reasons Your Budget Isn’t Working." Accessed April 8, 2020.

  3. Discover. "Are You Making These 4 Common Budgeting Mistakes?" Accessed April 8, 2020.

  4. Chime. "How to Make a Budget: A Guide to Choosing the Right Budgeting Style." Accessed April 8, 2020.

  5. Experian. "How to Budget as a Couple." Accessed April 8, 2020.

  6. Experian. "What Is an Emergency Fund?" Accessed April 8, 2020.

  7. Federal Student Aid. "Not Sure Where to Start in Creating and Managing Your Own Budget?" Accessed April 8, 2020.

  8. Experian. "How to Budget Using the 50/30/20 Rule." Accessed April 8, 2020.