Creating a budget was one of the best things I ever did for my personal finances and ultimately, my Financial Freedom.
I made a ton of mistakes along the way with my personal finances and a lot of them were to do with budgeting and basic money management.
If I had learned about money management earlier in my life, I would probably be far further ahead in my own Financial Freedom journey than I am now.
There are a lot of budgeting mistakes that almost everyone makes at some point in their lives. Here are some key ones to avoid:
This is perhaps the biggest mistake of all and it is made by all sorts of people, both rich and poor. There is a common misconception that if you don’t have that much money then you don’t need a budget. Ironically, there is also a misconception that if you have loads of money then you don’t need a budget. How does that work?
I believe that everyone should have a budget.
Having a budget makes you far more intentional with your spending. It makes you stop and consider purchases that you might have previously jumped into. But, it also makes you feel more comfortable about spending money. When you spend money that you had budgeted for, it doesn’t come with the same guilt and buyers remorse as impulse purchases sometimes do.
What it also does is helps you to save more money.
If you add savings and investments to your budget each month, rather than just saving ‘what’s leftover’ (which, let’s be honest, is usually not a lot) it means that you are making your savings a priority, which will fundamentally change how your money works for you.
Which brings me nicely to:
Paying yourself first is one of the oldest rules in the personal finance playbook. And that’s because it works! Plain and simple.
For those who are not familiar, paying yourself first is a concept where by the first payment you make after you receive your salary check or income is a payment to your savings and investment plans.
The theory is that by paying yourself first, you will remove the temptation to overspend and you will make a habit of saving and investment. This statement couldn’t be more true – it really works!
We all know that if you leave things to the end of the month and promise that you will save what’s left over (let’s be honest - there is rarely anything left over, is there?) then you end up saving not a lot.
On the other hand, if your savings and investment contributions are the very first thing to leave your bank account after payday, there are no excuses!
Go ahead and take action today. Set up a standing order to pay your investment and savings account on the day you get paid. You will be thankful you did a few years from now.
Some people try to do a budget by just lumping lots of things together into categories. While this is undoubtedly better than having no budget at all, leaving out the detail can make a budget pretty pointless.
For example, if you have your mortgage, utilities and grocery bill all lumped into one category under ‘household’, then how will you know if you are overspending on food?
I think it makes sense to make your budget detailed enough so you can gain meaningful insights from it and make positive changes on the back of that data.
On the other hand, you can take this too far which leads us to:
When it comes to budgeting, I think you can also have too much of a good thing. Yes – you want your budget to be detailed enough to give you useful information, but you don’t want it to be so detailed that it takes over your life and swallows up hours of your time filling in spread sheets.
Life is for living after all!
I think that somewhere between 20 and 30 categories is the sweet spot for budgeting. Less than that and the information might not be that useful. Much more than that and your monthly budget becomes an out of control monster.
You can download my free budget planner if you are struggling to get your budgeting categories set up.
Like anything that is worth doing in life, budgeting takes a little bit of work and commitment. You have to stick with it and make the time for it to work.
Some people get bored or give up too soon with their budget when they don’t see immediate results. But results take time. You have to be patient and go easy on yourself if you slip off track. We all do that sometimes, but the key is to get back on the saddle as soon as possible.
If you would like to get started with your own budgeting, I highly recommend you download my free budgeting worksheet. It has literally changed my life!