As a volunteer “budget coach,” I’ve reviewed lots of people’s budgets over the years. No two are exactly the same because people have different incomes, fixed expenses, priorities, and more. That’s to be expected. When it comes to budgeting, there’s no such thing as one-size-fits-all.
However, there are also certain approaches to budgeting that make cash flow management easier and more effective no matter your unique circumstances. Unfortunately, the use of these approaches is all too rare. As a result, here are five of the most common mistakes I see in people’s budgets. (See also: 10 Dumb Little Budgeting Mistakes You Need to Stop Making Today)
1. Not budgeting based on gross income
It’s relatively common to find budget recommendations based on net income — what’s left after all the withholding (for taxes) and transfers (for retirement plan contributions) are taken care of. The thinking is that net income is the money that’s available to you so that’s what you should base your budget on.
However, gross income is the purest, most complete view of your income. I prefer to use it as the starting point because some of the withholding and transfer categories are manageable.
Take taxes, for example. About 80 percent of taxpayers got a federal tax refund this year and the average amount was $2,851. That’s a lot of money you might have preferred going home in your paycheck. If you typically get a big refund, estimate how much you really should have withheld by using the IRS withholding calculator. You should also talk to your human resources department about having less withheld.
Retirement plan contributions are also manageable. Listing how much you contribute each month can serve as a helpful reminder to think about whether you’re contributing enough. Today, when so many workplace plans automatically set employee contribution levels — and with the default amount usually set at a low 3 percent of salary — it’s especially important to consider whether that’s enough.
2. Not putting first things first
Budgeting isn’t just about putting all of your monthly income and expenses down on paper. It’s about guiding your use of money in a way that enables you to live within your means and pursue the priorities that are most important to you.
One reason so many people struggle to build an emergency fund or invest for the future is they haven’t made those items priorities. It helps a lot to design your budget with saving, investing, and if this is important to you, giving, at the top of the outgo section.
List them first on your budget and subtract them from your income before setting your allocations for housing, transportation, clothing, and all the rest. Trying to take care of these priorities with money that’s left over after lifestyle spending usually leaves you with nothing to save, invest, or give. (See also: 7 Easy Ways to Build an Emergency Fund From $0)
3. Not budgeting for home and car maintenance
One of the best ways to keep your overall housing and transportation costs down is to keep your home and vehicle maintained and to make repairs on a timely basis. That will be a lot easier if you allocate money for those purposes in your monthly budget.
When it comes to homeownership, it seems there’s always something in need of attention — from a squeaky door to a leaky faucet to a furnace that doesn’t light. Depending on the age and condition of your home, $200 per month is roughly the right amount to budget for maintenance and repairs. If you own a condo or townhome, you should be able to budget less. Make sure you know what you’re responsible for and what your association is responsible for.
With vehicles, $75 per car per month is about right, but again, it depends on the condition of your vehicle. (See also: Bookmark This: Save Money With an Easy to Follow Car Maintenance Checklist)
You won’t spend these full amounts every month, but some months you’ll spend far more. During months when you don’t spend your full home or vehicle maintenance and repair budget, don’t spend that money on something else. Let it build up, either in your checking account or in a savings account designated for periodic bills and expenses.
4. Not budgeting for periodic bills and expenses
When my family used to live in the Chicago area, I’ll never forget the first property tax bill we received. I thought maybe one of our kids had been kidnapped and this was a demand for ransom. Property taxes in Chicago are extremely high.
That’s an example of a periodic bill or expense — a cost that doesn’t occur every month, but that needs to be paid at some point each year. If you don’t plan ahead for these big, irregular expenses, they can be real budget busters. Other examples include insurance premiums, end-of-year holiday gifts, and vacations.
Here’s what to do. Include one-twelfth of the annual cost of each such item on your monthly budget. Then transfer the total of all of these monthly amounts to a savings account dedicated to these expenses. That way, when the bill comes due, there will be money set aside for it. (See also: Pay These 6 Bills First When Money Is Tight)
5. Not budgeting for miscellaneous expenses
Having a zero-based budget is a worthy goal. That means income minus expenses equals zero. However, creating a budget where every dollar of income is allocated to a specific outgo category is far easier than following such a budget. No matter how detailed your plan, there always seem to be some expenses that just don’t fit into one of your preplanned categories.
To cope, set a monthly budget for miscellaneous expenses. But not very much — $50 is a good limit. If miscellaneous items start running higher than that, see if some of those expenses are similar enough to warrant their own category.
Especially if you’re new to using a budget, there can be a number of frustrations that make it tempting to quit. Avoiding these five common budgeting mistakes will go a long way toward lessening the frustration factor, and that should help you stay with it.