Are you tired of winging it? You know, just letting your family’s financial chips fall where they may because it seems so much easier than actually thinking about your spending habits? Sadly, you are in the majority; most Americans do not properly budget their expenditures. A proper budget can bring with it a host of positives: less debt, more money for college and retirement, to name but a few. But just having a budget is not enough in and of itself: you must also avoid the common mistakes that budgeting can sometimes lead to.
If you’re ready to take the next step – to really buckle down and track where the money’s going with an eye toward righting your ship for a more secure journey into the future – you’ll want to read this list of ways the budgeting process can go wrong. Then, just do the opposite!
- Not Using Family Budgeting to Help Pay Off Debts
It’s great that you’ve decided to start budgeting and it’s even better that you’re sticking to it. You’ve discovered that getting a handle on your spending has freed up additional money every month. Now is the time to go the final step in the process by using those new-found resources to pay down whatever debts you may have. Think of it this way: you’ve stopped the bleeding, now it’s time to heal the wound. If you’ve only been paying the minimums on your credit cards, start throwing more money at them. If you’ve got a high-interest rate, long-term loan on your car, start paying more than what is required in order to shorten the loan and lessen your interest burden. Failing to pay down debt as part of your new budget is one of the biggest mistakes you can make.
2. Not Having a Realistic Debt Reduction Timetable
If part of the goal in budgeting is to pay off debt, it is unrealistic to believe this will happen in just a few months. With the average Americans’ debt into five figures (income growth has been far outpaced by cost-of-living inflation in this century), it’s going to take a year or more to get rid of your burden depending on how aggressive you are with paying it down.
As a rough general rule, for every 10 percent you add to your debt payment, you will be taking two to four months off of the term of your debt while simultaneously reducing your interest load. For instance, if you owe $20,000 at 10 percent and are paying $350 a month toward it, you won’t be paid off until 2021. Making 10 percent additions to that payment ($385, $420 and so on) will accelerate this timetable incrementally. For instance, adding 20 percent shortens the payment by a year. If you could find your way to double your payments to $700 a month, your debt would be gone by the end of 2017!
For more information, check out www.Powerpay.org, a website dedicated to debt reduction and budgeting. They have calculating tools that allow you consider various scenarios that can help you determine how long it would take to pay off your debts using a variety of payment strategies.
Remember, it took a while to accumulate the debt, it’s going to take a while to pay it off. The budget is there to remind you that you’re in it for the long haul — and imagine the excitement you’ll feel when you make your very last payment!
3. Not Being Flexible with Your Family Budget
A budget is a living document, meaning it can change as time goes by based on income and unexpected debts. Be prepared to review it and make alterations regularly.
4. Not Taking Spending Habits into Consideration
Just creating a budget based on debts and income and not taking into consideration where your money goes will render your budgeting efforts dead on arrival. Before setting a budget, meticulously track all spending for a month to see where every cent goes. By getting a detailed picture of your expenditures, you can create a budget you will be more likely to stick to because it’s based on your real life experiences.
5. Not Planning for Emergencies
One guarantee you can count on is that you are going to have unexpected expenses. You can let these monetary arrows disrupt your budget completely or you can head them off — even if it’s only partially — by building an emergency slush fund into your budget. Then, when an appliance breaks just out of warranty or you lose income due to an unforeseeable circumstance, you won’t be playing catch-up for months to come.
6. Letting the Expected Become the Unexpected
Some expenses are completely unpredictable, while others are foreseeable. Many of the items you own have life expectancies that can be predicted to some degree. For instance, having to replace the tires and brakes on your vehicles should never come as a complete surprise. Keep track of when you made purchases and replacements of items with limited endurances and plan accordingly for their demise. This way, you’ll be able to prepare for the repairs rather than being ambushed by these eventualities.
7. Not Using a Money Management Professional to Help with Family Budgeting
Apart from their expertise, the nice thing about a money management pro is their objectivity. Because they have no personal stake in your family’s budget, they can remain above the fray of conflicting spending patterns. Because it’s so rare to find that everyone in the household is on the same page when it comes to finances, it’s nice to have the professional involved so that they can be a mediator of sorts to help smooth out any conflicts in the budgeting process.
8. Being Too Budget Conscious
Yes, it’s entirely possible to lean too far in the other direction. If no money is allocated for fun times and the occasional indulgence, families can quickly come to resent budgeting. When families commit to a budget, they often think they are automatically assigning themselves to a life of grim austerity; they believe they will not be able to have discretionary funds, meaning no “play money.” This is not necessarily true — as long as you budget a realistic amount for dining out, going to the movies or taking a trip, you can still take part in those things.
9. Not Striking a Balance Between Savings and Debt Reduction
While we have stressed the necessity of paying down your debt as part of this process, attention must be paid to savings as well, if only for those emergency situations discussed above. Therefore, small contributions to savings while aggressively paying off the debts may be the best of both worlds. The important thing is to set goals in both areas and make sure they are realistic. We all like to feel a sense of accomplishment, right? If your goals are unrealistic and aren’t met quickly, it may cause you to give up – and then you’re back to where you started, which is the last thing you want.
10. Ignoring the Counsel of Experts
Good advice is there for the taking, either from professionals, self-help sources or friends who have successfully navigated a similar journey. To either pretend these outlets don’t exist or seek them out and then not heed their advice is like not listening to what your doctor says about that growth on your leg. We all think we are above asking for help or that we know more than we do; it’s human nature. The truth is, all successful people had help and got expert guidance along the way – it’s why they’re successful. Following good advice is a major step on the road to success. And, when you’ve completed the transformation to a fully budgeted, debt-free family, you may be surprised to find your friends coming to you for some good advice on how to do it!
About The Author
Terry McCoy has spent over 25 years in the credit union industry all focused in the lending area in both New York State and Texas. He has spent over 16 year at his current credit union, Amplify Credit Union, in dual roles as a Sr. Training Specialist and a Sr. Credit Analyst. Outside of the credit union industry, he has spent the last 4 years as a volunteer Credit Counselor, Financial Counselor and a facilitator of Money Management classes for an Austin affordable housing non-profit.