8 Budgeting Pitfalls and How to Avoid Them

September, 22 2020

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Thinkflow Team
Written By
Thinkflow Team
Topic
Cashflow, Budget

At least 74% of Americans have a budget, but almost 80% don't actually follow it. 

Having a budget can make you feel like you're in control of your money. But when the end of the month rolls around and you don't have enough to pay your bills, you'll see it was just a false sense of security.

The truth is, a budget is an imperfect tool. Read on to learn budgeting drawbacks to avoid so you can make the most of your money. 

    1. Basing Your Budget on Past Behavior

With a traditional budget, you look at your past spending habits to create a plan for your money in the future.

While this works for recurring bills, it doesn't account for surprise expenses or bills you pay once a year. That includes things like car repairs, tax bills, and license renewal fees. 

A better way to budget is to use the cashflow strategy so you look forward at your expenses instead of backwards. By looking to the future, you can prepare for these extra bills before you're in a jam. You can also build emergency savings to cover unexpected bills. 

    1. Ignoring the Timing of Your Paycheck and Bills

Keeping a list of your income and your expenses for the month is a simple way to budget. The trouble is the timing of your paycheck and your bills won't always line up. If most of your bills are due at the beginning of the month, you could run out of money for groceries before your next paycheck, for example.

A good solution is to use last month's pay to cover this month's bills. To start doing this, you'll need to save one month's worth of income. You'll have more flexibility if something changes your usual payment schedule. 

    1. Creating a Budget Based on a Hypothetical "Fantasy" Month

Focusing on what could be rather than reality isn't good for your budget. Sure, having an extra paycheck each month would help, but is it really happening?

The best fix is to be as honest as possible. Focus on your actual paycheck to create a realistic budget. If money is still too tight, you can look for a higher-paying job, add a side hustle, or look to reduce your bills.

    1. Using a Budgeting Strategy That's Reactive

Traditional budgeting tells you to learn from your past financial habits and mistakes. While that is useful, life happens forward. If you overspend your grocery budget or have an unexpected car repair bill, you won't see how that affects your future budget. 

While unexpected expenses are inevitable, you can be proactive instead of reactive. To create a cashflow forecast for the next month, see when your paycheck will come and make a plan for each dollar. A good way to do this is to put all of your income and expenses on a calendar and calculate your future balance every day, which is what Thinkflow’s financial dashboard can do for you. Also, make sure to set aside money for savings, an emergency fund, and fun spending money.

    1. Thinking of Budgeting as a Form of Self-Punishment

You're probably starting a budget because you want to save money, pay off debt, or stop overspending. You might want to stop your bad habits cold turkey – but that can feel like self-punishment.

Some types of budgeting like the envelope strategy can feel restrictive. With that method, you divide your cash between envelopes, one for each category, and once the money is gone you can't spend any more. But what if a friend invites you to dinner or you want to take a short weekend getaway?

No matter how strict your budget is, don't forget to set aside some money for fun. When you don't feel deprived, you're more likely to stick to your budget. 

    1. Believing That Saving Can't Be Flexible

Some budget plans consider saving as a hard expense. In other words, it's treated like a fixed amount just like your rent or mortgage payment.  

The trouble with that is you won't get to take advantage of low-spending months or plan for high-spending months. That's why saving should be flexible. 

Some months you might have car insurance premiums or taxes to pay, so savings can take up less of your budget. If you have fewer expenses for a month, you can ramp up the amount you put into savings. This flexibility will give you some breathing room in your budget. 

    1. Ignoring the Dangers of a Zero Sum Budget

Zero sum budgeting expects you to get to $0 at the end of every month, with every dollar accounted for. But what budgeting doesn't do is keep track of your bank account balance. If your checking account gets to $0, you're at risk for overdraft fees. 

Remember that budgeting is just a tool and not a map of all your finances. You're allowed flexibility even when you're trying to hit your financial goals. 

    1. Not Keeping Track of Your Spending

One of the most important parts of budgeting is keeping track of every dollar you spend. If you don't, you could overspend your budget (or not spend enough, which means you don’t have a plan for your dollars).  

A good solution is to list everything you spent at the end of each day. You can use a notes app on your phone or old-fashioned pen and paper. The important thing is that you write down everything you spend. 

Make sure to include small things like your morning coffee and public transportation costs because those small expenses add up over time.

Do this until you can see patterns in your spending – usually a few weeks to a month.

 

Choose a Budgeting Strategy That Works for You

When it comes to managing your money, it's important to choose a strategy that works for you. No two people have the same life and financial situation, and your budgeting strategy should reflect that. Create a plan by using the aspects of budgeting that work for you.

If you're looking for a new approach to managing your money without going broke, try Thinkflow. Our tool helps you look forward at your finances so you can catch problems before they happen. Sign up today for free to take control of your finances. 

 

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