There are a lot of challenges consumers face with their finances and one of them is committing household budget mistakes. The household budget is one of the most basic financial tools people use in their daily lives. As such, it is one of the most crucial aspects of your money management. It plays an important role in determining your financial success.
Managing your budget might be the very basic but it is no walk in the park. One small error could lead to financial mistakes. This can also ripple out to several areas of your finances. This scenario underscores the importance of putting together a solid household budget. It needs to be on point and be able to provide you the oversight you need to manage your finances.
This is one of the key characteristics of your budget – it gives you an overview of your total finances on the very basic level. It lets you know how much your money is based on how much is coming in from all income sources. Your budget also gives you an idea how much your total expenses are and if you have enough to cover all of them.
It is a good thing that American consumers are more inclined in saving money rather than spending it. This is according to a Gallup.com survey showing two out of every three consumers prefer to save than spend. This is a good start to budgeting their money. It is easier to budget when you already have the preference than wasting away your money with unnecessary expenses.
Here is a list of budgeting mistakes which can open your eyes and help you realize your mistakes
Mistake: Budget is based on gross income
One of the most common household budget mistakes you might make is at the forefront of the whole process. As you put together your income, there is a possibility that you are using the wrong figures. Do not use your gross income in planning your budget. It is because you would not be getting that amount in the first place. It can ruin your whole budget even before you have started.
Solution: Plan using your net income
The good thing about this is that it is easily fixed. Once you start putting your income together, you can still look at your gross income. However, when getting down to budgeting, you need to use your net income. This is a more realistic representation of how much you really have coming in. You will be more on point when you budget for your expenses.
Mistake: Failing to list down all your expenses
Moving on to the other side of your budget, your expenses is equally as important as your income. It forms the other half of your budget and allows you to see the big picture when it comes to your finances. One of the reasons why people commit household budget mistakes with their expenses is they are unable to list down every single expense.
Solution: Jot down all your expenses
It can be due to oversight or even an inner desire to convince yourself that you are not overspending. Whatever the reason is, it is important to note down all your expenses. Forbes.com shared that the most recent holiday could have exceeded $1 trillion in spending. This means it would be more challenging to jot down all your purchases. However, this makes the practice even more critical. You do not want to start the year unable to reconcile your expenses.
Mistake: Keeping up with the Joneses is another type of household budget mistakes
Simply put, you should mind your own business and not compare yourself with the people around you. This is a social trap that pits you against the more financially stable people around you. It can be your next-door neighbor or a colleague in the office which is a career mistake on your part. It can be a childhood friend or a close relative. Whoever it is, you might not notice that you are trying to benchmark your finances against that of other people.
Solution: Stick to your own financial goals
The way around this is to start looking at what your financial goals are in life. You need to use this as your benchmark to measure your progress and not other people’s financial status in life. If you see other people succeed, be happy for them and use it as an inspiration to achieve your own goals. Seeing your neighbor drive up a new car in their driveway is not reason enough to get a new one for you own as well.
Mistake: Plotting unrealistic goals
This is where household budget mistakes usually happen. It is important to have goals when it comes to your finances. However, you might be trying to go for unrealistic goals. This can lead you to push yourself too hard and result in unnecessary stress and even fatigue. You might even feel that you are not any good because you are unable to reach your goals.
Solution: Be SMART
As Clevelandbanner.com shares, SMART is an acronym. It stands for being Specific, Measurable, Attainable, Realistic as well as Time-bound. These are ideal characteristics of your financial goals. It can help you put together targets that you can reach with your current resources. Take a look at your goals and see if they fit these characteristics.
Mistake: Putting an inflexible budget
There could be times that you are too rigid with your budget details. You should know that there is a fine line between being too exact and being too lenient. There is a chance that you gravitate more on one side. Either you plan down to the penny or you use ballpark figures. Neither one of them would help and could result to a useless budget planning.
Solution: Leave some elbow room for movement
The idea is to strike a middle line between the two. Try to put in some wiggle room for your finances to account for the unexpected. However, you should not plan too loose that you actually lose control of your budget. It is important to be mindful on the level of leeway you put in because the last thing you need is an unreliable budget.
Mistake: Having a complicated budget
There are people that believe that the more expensive an item is, the more valuable it is. This is one of the most common household budget mistakes. When it comes to budgeting, the more complicated it is, the better. They believe that this is better because it can cover for any and all budget eventualities. The more complex a budget is, the better it would be because it works for other people.
Solution: The simpler the better
One of the ways to overcome a financial slump is to keep things simple. The same principle can be applied when you are putting together your budget. At least, start with a simple one that you can easily understand. You need to be comfortable with it and understand every aspect of your budget. The idea is to add on and improve on it as you go along based on your need or changes in your finances.
Household budget mistakes can pull you away from your short and long term goals. Apart from the list above, you need to learn from your past year’s mistakes and do a better one this year. The idea is to improve and be a better version of yourself.