These are some telltale signs that you might not be as good at budgeting your money as you think you are. Just because you have some sort of budget doesn’t mean it’s a good one. See if you’re making these common budgeting mistakes.
Your budget involves envelopes.
A very common piece of advice and budgeting trend is sometimes called the “envelope system”— a method where you put your gas money in one envelope, your grocery money in another, etc., and only spend the money in the envelope on the category on the label. If this sounds like your system, here’s why you should change it:
The envelope budget goes against some fundamentals of how money works, because all dollars are actually the same. There is no such thing as a gasoline dollar, a grocery shopping dollar or a dollar for spending on fun. The envelope system sounds like a simple and nice visual way to handle your money, but this is not how you’ll get the most value out of it.
The reason this doesn’t work is because prices for many things change all the time. Gas prices, for example, are some of the most unpredictable. So while your fixed monthly budget for filling up your car might be enough one month, next month you could be riding on E more often because you’re trying to only spend your allotted “gas” envelope money. This can be dangerous.
Another example is when grocery shopping. Maybe the price of milk or some produce goes up one month. To make up for this, you would have to cut back on other groceries you’re buying during that trip to not go over your “grocery” envelope budget. So then you cut back on groceries while you are still spending the same amount of money in other areas like your “eating out” envelope, for example.
In this case, rearranging your money in other categories would make way more sense to adjust for changing prices. But of course, this would be defeating the purpose of the envelope system, proving it worthless.
You use automatic bill pay.
Setting up automatic bill pay can be good or bad advice depending on your situation.
If you are a forgetful person who finds it difficult to remember due dates or if you’re too busy to pay your bills manually, this is a good way to make sure you never miss a payment deadline. However, this is only good if you’re also sure that you will always have enough in your account to cover all your different payments each time a bill is due.
If you have automatic bill pay, you might feel like you don’t even need to know when your bills are due since you don’t have to send them yourself. But, not knowing when money is going to be withdrawn from your account can be dangerous if you’re not careful.
Depending on your spending, your bills and your paycheck, the wrong timing can easily lead to accidently overdrawing your account. Overdraft fees with every bank can vary, but it can cost you up to a $50 penalty per transaction that you make with insufficient funds.
This won’t affect your credit score or anything major, but it is unnecessarily expensive. Plus, this is a major sign that you don’t know your expenses and income very well. An overdrawn account isn’t something that a person with a well-planned budget has.
Automatic bill pay is not a bad thing in and of itself; it can even be helpful and even get you discounts. But this option is only good if you are still paying attention to your money management. You can’t just “set and forget” your bill payments.
You’ve made late payments recently.
With a good budget, you should always know when all of your payments are due. Your budget should also include a plan to have enough money around those dates to pay on-time. If you’ve made any late payments recently, it might be time to improve your budget and how it’s scheduled. You might also want to look into working with these companies to change the due dates of your bills to be closer to payday.
You’re surprised by your bill amounts.
Someone who is good at budgeting is always keeping in mind what they’re spending and always has an idea of what their bills will look like each month, well before they arrive. If you are constantly surprised by what your bills say each month, it’s time to pay closer attention to your habits and consider changing them. Or, simply remember and write down each bill amount so that you can allot enough money to them in your budget.
You don’t have an emergency fund.
This is a mistake that can lead to serious financial consequences. Many people are money savvy enough to put some of their income away in savings, but they aren’t always planning for an expensive emergency. Maybe you have mentally dedicated your savings for a future vacation, a car, or other “fun” things, but are you saving enough that you could use your savings for a financial emergency if you needed to?
If you’re in good health, you might not consider that a medical emergency could happen to you, so you don’t have money put aside just in case. But the thing is, no one ever expects an emergency. Not only that, but an emergency fund is important in case you suddenly need repairs on your home or car or need to replace something expensive like an appliance. Your budget should include putting money aside for these things (though less exiting), because if you aren’t saving for a rainy day, an emergency can put a huge strain on your finances.
You don’t have enough (or any) health, auto or property insurance.
For the same reasons that you should have an emergency fund, you should also have these basic insurance plans. Paying for insurance each month isn’t fun or cheap, but it can be much more expensive to assume that nothing will ever go wrong. If it does, you will be very glad you had insurance.
Think: do you have enough money right now to pay for a surgery, or to replace your car or house and everything in it? Hardly anyone has enough to pay for those things on their own. That’s why it is important to have enough coverage to be able to afford these situations if they were to ever happen.
Insurance coverage may take up a larger part of your budget than you’d like, but it could save your financial situation from ruin in the future.
You don’t know how much you earn or spend each month.
This is budgeting 101. If you don’t know how much you earn each month, how much you spend and where, hate to break it to you, but you don’t have a budget at all. Analyzing your bank account statements is one of the easiest ways to find out how much money comes in and out of your account each month. If you don’t have a bank account, this can take more work but it is still important.
Add up how much you actually earn each month after taxes. Then, take a look at where that money went and how much you spent in certain categories. This is what it should look like:
One of the best budgeting models is the 50/20/30 system. It splits everything into three main categories where you should be spending maximums of 50 percent of your earnings on “essentials”, 20 percent on “savings” and 30 percent on “personal” expenses.
Following this rule, you should spend no more than half of what you make on essentials like housing, food, medication, insurance, cell phone bill, utility bills, and transportation.
This category is kind of like paying for your future financial well-being. This includes paying off debt and loans, and putting money into saving for an emergency fund, retirement, vacation fund etc.
This is for your everyday costs that aren’t quite needs, but they are still essential to you. This can range from wants like shopping and going out with friends to more important wants like a Netflix subscription or a gym membership. You could live without these things, but they’re important to enjoying the present.
Though everyone’s budgets look different, it’s important to have one with some kind of structure like this to comfortably pay for your present expenses, your future and to have some fun while keeping close track of it all.