Budgeting is a foundational tool and skill that must be learned if you desire to take control of your money and grow wealth. You can be successful at making a lot of money, but if you do not know how to manage it, you will have nothing to show for it.
Managing your money by creating a spending plan (budget) applies to all income levels because the math is the same for everyone. You need to keep more money than what you spend. If you do this consistently month over month, you will see your wealth accumulate and your net worth increase.
You should strive to be a great steward of the financial resources you have been given. This demonstrates that you can be entrusted with more. Creating a spending plan is a foundational practice that helps you do that.
One of the first mistakes people make when managing their money is winging it; hoping that it will all balance out. This is a losing strategy. But since you are reading this article, you don’t fall into that category.
Like any new skill, there are some potential pitfalls that you want to avoid on this journey.
This article will outline the top mistakes people make when creating a budget and how to avoid them.
No Defined Financial goals
It’s hard to direct your money to a specific destination when you don’t have one. Money should serve you, not the other way around. The way money serves you is to first have a purpose for your money to accomplish. What should your money be doing for you? If you want it to grow and multiply then you have to direct it based on your goals and priorities.
There are a couple of reasons why people don’t have financial goals. Some of the reasons range from they believe the process may seem daunting. Others may have an over-reliance on winging it. Or they may fear creating goals that they believe they cannot achieve. These behaviors are fear-based and should be addressed immediately. .
How do you address them? Great question. You can address it through execution. Dedicate an hour or two and start where you are. Start writing down what you want your money to achieve for you and your family. If you are not prepared to do the full-blown financial vision exercise, start with where you want to be in the next five years. From the five-year mark, work backwards to the current year. What goals do you need to achieve this year to reach your 5-year mark?
“Failing to plan, is planning to fail.” – Benjamin Franklin
Failure is not an option so create your financial goals today.
Not verifying the numbers
In addition to not creating financial goals, another mistake people make when creating their budget is not verifying the numbers. The numbers refer to both your income and expenses.
How much do you take home after taxes?
How much does it cost for you to live?
These numbers are important. Too often people are winging it and hoping that the numbers balance. Unfortunately, it doesn’t work that way. Don’t try to guess your way to wealth. Intention makes a huge difference in staying on track.
6 Ways to Be Intentional With Your Money
People don’t face the number for several reasons. It can be overconfidence in the ability to get it right. It could be fear in acknowledging spending habits which could lead to shame and guilt. It could also be a sense of not having the time to focus on it. These reasons are excuses and must be managed if you want to build wealth.
Here’s what you do: To get a good understanding of your income, you should review your pay statements from all your income sources. Identify your net pay over the last three months to see if there are differences in pay and why. Remember to account for any changes in your spending plan.
To better understand your expenses, you should complete a spending analysis. Review your spending history from the past three months from your bank statements, receipts, or financial app, such as Mint. Confirm these numbers before you complete your spend plan.
Too Restrictive
Budgets get a bad rap. Too often budgets are viewed as being restrictive rather than empowering. Instead of empowering you to choose how you will spend your money, if not prepared correctly, it can set false expectations and lead to frustration which then leads to not adhering to it.
Once you have written down your financial goals and determined how much it will cost to get there, you want to make sure that your budget is not excessively restrictive which can lead to shortfalls in mandatory spending areas. For example, there is an obsession with being debt-free by next week. Ok, maybe not by next week, but there is this obsession to be able to scream, “I’m Debt Free” as soon as possible.
It’s great to quickly eliminate debt. But instead of focusing on acceleration, make sure you can be consistent. Consistently paying down your debt, without accumulating more, may take a little more time, but it will prevent shortfalls in other areas in your budget. You will still be able to maintain a standard of living that is sustainable.
Whether or not your goal is to aggressively build up your cash reserves or eliminate debt, factor in how much you can realistically dedicate from your income now. If you desire to increase the pace of reaching your goals then identify ways that you can generate additional income to meet your goal. The key is to make sure that you can sustain your lifestyle to meet your goal and not burn out in the first quarter.
“Life is not all about saving every penny and eliminating your debt by tomorrow.”
The excessive restriction is like extreme dieting. It should be a challenge, but not something where it will cause you to bounce back the other way. It’s important to have some fun money that you can use to celebrate your wins and encourage yourself to keep going.
Saving Last
When creating your spending plan, you want to look at saving as an expense rather than an optional category. For you to transition from paycheck to paycheck to building wealth, there must be a surplus in your spending to first save and then invest.
“It’s not how much you make, it’s how much you keep.” – Unknown
Saving is extremely important because this is what will help prevent an inconvenience from turning into a disaster.
It’s easy to think of saving as an afterthought. Of course, you want to make sure that you have food and shelter, but if saving is not a high priority, then it likely won’t happen.
You must change your perspective on savings. It is not just a nice to have, but a requirement, a mandatory expense. Make saving a monthly expense that is automated and defined based on your goals/priorities
Setting and Forgetting It
You have dedicated the time and hard work to create a spending plan that aligns with your goals. Congratulations! You should celebrate this accomplishment. But too often, people stop here believing that the plan will take care of itself. Once you have the plan, you must work the plan. If not, you can default to old spending habits.
The real work happens when you execute according to your plan.
Planning is an integral part but, the execution is where the results are. Your execution strategy can be a combination of manual and automated processes. For example, you can decide to manage your spending by using the cash envelope system where once the money in that envelope is gone, your spending is complete for that category. Another manual process can be when you select a day to manually pay your bills from your checking account.
One example of automating your spending plan is to have your savings deposited into a savings account. Another example is to automate your bills through your banking bill pay system. Automation saves you time and energy, but make sure you confirm it was processed correctly.
Regardless if you decide to commit to your budget manually or through automation, the main point is that you must execute according to plan.
“What gets tracked, gets done.”
Conclusion
Choosing to create and commit to a spending plan is a major step to your wealth building journey. Avoid the stress and frustration by using these tips to streamline your process and create a spending plan that is realistic and sustainable. It’s time to take action. So create your financial goals, verify your numbers, create a sustainable plan, make savings a priority, and refer to your plan often.
That’s getting your Finances On Point.