4 mistakes most people make in budgeting
Money is a touchy subject for many. It’s tied to the type of life we’re able to live, pressure to work a certain way in order to meet obligations like expenses or debt and for some, if not many of us, shame around ways we haven’t done the right thing when it comes to money.
But we can’t avoid it. Money is the way that much of the world functions and our abilities to live our dream lives, whether that’s traveling the world, camping every weekend, having a huge lego collection or time with family, depends on our ability to navigate money.
I can’t talk about money without acknowledging that there are substantial systemic issues making it hard to be good at money - rising cost of living, a student loan crisis, predatory lending, lack of financial education and punitive policies all make it hard for the average person to even be “okay” at money. And much of the world tries to imply that it’s a problem with us. No matter what the boomers say, buying a house by 35 is going to be out of the question, no matter how hard I work, when cost of living has increased at almost twice the rate of salaries, let’s be honest!
This leads to a whole lot of unhelpful money advice: stick to your budget, track every penny, and cut unnecessary expenses. While there’s truth to these tips, they can feel insulting against the larger context.
But we can’t individually control policy changes or global economic trends. What we can do is the best with what we have and take responsibility for the actions that we’re taking. This is why, regardless of your financial situation, getting clear on it and making a plan to move forward is crucial.
Our founder, Samantha, is particularly passionate about this, not because it was hard for her, but actually because she had many advantages. Both of her parents put a premium on being financially literate and taught her from a very young age. She learned investing, the power of compound interest and many fundamental money concepts young and as a result, her early 20s financial reality felt very different than other young adults her age.
“Do I need a budget?” Why are budgets helpful?
Samantha, Eldest & Co founder here. Let’s start at the beginning, shall we? Is budgeting necessary for everybody? It’s not. But if you’re stressed about money, it’s going to be hard to undo that without a budget and here’s why: feeling stressed about money is often tied to unknown, “will I have enough?” “how do I have so little?” “where will the next paycheck come from?” If we have no idea the current state of where money comes from and goes to that can partly come from a budget, we are feeding the unknown and stoking our own fears.
Of course, there’s a common fear amongst non-budgeters that seeing where the money is going or the gaps in your money life will be more painful than the current situation. That’s the voice of the unknown talking. It’s saying: “it could be so bad. Just stay blind to it a bit longer.” How human of us! It’s normal to be scared of what we don’t know, but you’re here because you want to take control back, right? That starts with facing these feelings head on.
In my opinion, if you’re afraid of the unknown, you’re the type of person who will benefit from a budget the most. Might it sting initially to actually see the reality of where your money is going? Yes, it might. But once you have the information you can begin making informed choices to create the financial future you want. Without the information, you’re just making shots in the dark and you could actually be making it worse.
So does everybody need a budget? No. If you feel solidly in control of how much you spend and on what, and where your income goes to pay not just for life today but in the future, you might not need a budget. If you know you are living way below your means, a budget may not be necessary. For everybody else, I think a budget can be enormously helpful. Maybe not forever but at least for a season as you begin to go eyes wide open about what your finances look like today so you can feel confident in the changes you’re making for the future.
But a budget can be big, overwhelming and intimidating if you’re just starting out, so let me talk you through some common mistakes I see that might be making it harder.
Common budgeting mistakes to avoid
Mistake 1: Relying solely on manual tracking
Let’s be honest: the idea of manually tracking every penny might be useful but it’s not realistic for many of us with busy lives. Keeping track of every coffee run and late-night snack gets annoying fast. There are some experts that say you should do it for one week just to face the reality of how your spending is adding up and while I can see how that exercise might be illuminating, I just don’t think it’s necessary.
That’s where technology can be a lifesaver. Technology can help you categorize transactions, keep tabs on your spending, and even catch those sneaky little expenses that somehow slip through the cracks. Instead of holding on to receipts and spending time logging them into your system, using an app that automatically ties to your credit cards, bank accounts, etc. can help you start with all the information together and your job is just to review and interpret.
Even still, it can be overwhelming when you first input all the information and you have thousands of transactions to review and categorize. As someone who’s been through it, it’s worth spending one afternoon doing this so that you can have automatically updating information with categorization moving forward. These days, I check my app 1-2x a month, correcting any incorrectly categorized transactions (there’s always a few), looking into any unknown charges and reviewing my budgets and the whole exercise takes me a few minutes.
I use Quicken Simplifi for this and love it. It has all the features I need, the spending plan (their nice name for budgeting) is intuitive and clear and I can have all my accounts in one place. I have friends who use YNAB and swear by it. Other popular options include Monarch Money, Rocket Money or tools natively from your bank. Don’t overthink the choice, pick one and get into the data.
I do keep a spreadsheet so I can look at the year to date all in one glance and have a record of spending that can’t be affected by any tweaks to a live system. This is a nice to have, not a must have.
Mistake 2: Building a budget based on dreams instead of reality
Once you have all the data, the first thing you’re going to be doing is coming to an understanding of where your money is currently going. This isn’t your budget for the future but more of a snapshot of what your current spending looks like. It’s all nice to say “my budget for dining is $300” but if your Uber Eats bill alone is $400 monthly, then that budget is just a pipe dream.
I actually tracked my expenses for a few months before I ever set forward thinking budgets. I just came in and looked at how much I was actually spending on eating out, on my personal care, and on the random little expenses that pop up. Once you have real data on your spending habits, you can build a more sustainable budget that reflects your life instead of an idealized version of it.
Think about it this way: if you’ve got a crushing student loan payment, trying to line-item your budget to reflect a life filled with spontaneous brunches and shopping sprees will only leave you feeling inadequate. Rather than setting yourself up for failure, acknowledge where you are. At the end of the day, math will make things very clear in terms of where you have space and where you don’t.
This is a place that can kick up shame in people and cause them to walk away from their budget before it’s even done anything. Pause to acknowledge whatever feelings the numbers are bringing up and remember: “I’m taking control of my money for my future. It may be difficult now, but moving through this is how I’ll feel better in the future.”
After you have a general handle on where your money is going, start sketching out the categories of spending based on fixed expenses first: rent, utilities, debt payments, etc. Then move on to the more variable categories: groceries, eating out, personal care, travel, etc. Start from numbers informed by the reality of your spending - don’t try to make drastic cuts at the beginning, but you do have to make the numbers of all the amounts to spend across the categories add up to the number you get in your account each month. Don’t budget to spend money you don’t have, that’s just going to make the problem worse.
But this brings us to our next super common budget mistake…
Mistake 3: Getting too granular with budget categories
You don’t need to track 27 different categories at the beginning (or ever). Making this too complicated will make it less likely that you keep going so I definitely recommend you start very basic and it’s okay if you have a category called “everything else” or “buffer.” This was my approach when I started out and over time as I collected more data, I was able to add more categories based on more information.
If I were just starting out, I’d probably look at categories like this:
Fixed Expenses: Rent, Utilities, Car Payment, Debt Payments, Health Insurance, Investing
Variable Expenses: Groceries, Dining, Transportation (Gas, Parking, Rideshare), Healthcare Costs (Doctors Visits, Prescriptions), Personal Care (Haircut, Waxing, Nails), Travel, Shopping, Fitness and most importantly, BUFFER (to hold everything else that I don’t have captured)
If that feels like too many, simplify. I probably wouldn’t go for much more, unless there are categories in your life that I don’t cover like pets or children.
Keeping it simple at the beginning will stop you from getting overwhelmed. That keeps your momentum building!
Mistake 4: Forgetting to plan for one-time and irregular expenses
When you first make a budget, you will be thwarted by a one time expense. Whether it’s an unexpected furniture replacement, holiday gifts or urgent maintenance, something will come up that you didn’t have in the budget. This can make you feel like your budget is broken. It isn’t, you just haven’t refined to to include these slightly different expenses.
Over my years of budgeting, I’ve added in categories for things like gifts, so I have room for the random wedding presents and the big chunk at the end of the year for holidays. Depending on which system you use, you might track this differently. A great strategy is to create sinking funds where you put small amounts of money in over the year, so when these one time expenses come up, you’ve got the money sitting there. In Quicken Simplifi, you’re not actually moving this money anywhere but using Rollover expenses, you can account for money that you’ll spend in the future that builds up over time.
Either way, if you can get some of these on your original budget, amazing but also don’t be ashamed if you add it in a few months or at the end of the first year.
Mistake 5: Not understanding that the system takes tweaking
And that brings us to the final budget mistake I see many people making: thinking that once it’s built, you’ll live with it the same way.
There are a few ways a budget will shift:
You get a more accurate understanding of your spending. For example, in my late 20s, I had an estimated spend on dining out but month over month was going outside it. At a certain point, I had to be honest that my monthly spending was higher and adjust the amount up.
You want to make a behavior change. If you decide that you’d like to reduce your spending in one category, you might tweak that budget to make the dollars work the way you want. The behavior won’t change just because the number in the budget does - you have to do that work in your day to day. For example, in the above scenario when I realized my dining spending was higher than I thought, I consciously decided to skip a few clothing purchases to keep my budget on track, so my Shopping budget dropped down.
Your life changes. If you get a pet, move in with a significant other, or move cities, it’s completely normal for your budget to need to adjust. Getting ahead of these changes in doing the math about how a pet might add to your budget can make sure you have the time to make sure the math still maths before little Rex appears in your apartment and you fall in love.
Budgeting is an ongoing process. Just like how we adjust our game plan when life throws us curveballs, our budget needs to adapt as our financial situations change. Whether you’re at the beginning tweaking to really capture reality, in the midst of it tweaking to create space in a different area, or in the planning stage tweaking to prepare for a life change, it’s normal to adjust your budget.
Don’t rewrite it monthly to map to what happened that month - that would be counterproductive. But the more you start to get clear about where your money is currently going, the more empowered you’ll be to make choices about where you want your money to go to allow you to create your ideal financial future.
Frequently Asked Questions
Q: How often should I review my budget?
A: It’s a good practice to review your budget monthly, this is what I do. This allows you to adjust based on recurring expenses or changes in your financial situation. It also helps you catch any fraudulent expenses and make sure you’re not missing any bills.
Q: How do I start budgeting if I’ve never done it before?
A: Hook up your accounts to a budget app of choice and categorize the last 1-3 months of expenses (don’t worry about too much historical, it can be overwhelming). Let a month pass and then sketch out your rough categories to track for the future, using a “buffer” or “everything else” category to capture unexpected or miscellaneous expenses. Then as you know where your money is going (this’ll take 3-6 months), you can begin to make active adjustments about categories you want to move up or down, which sets the goals for your actual spending behavior when you’re outside your budget!
Q: Can a budget help if I’m spending more than I make?
A: First of all, you’re not alone - there are so many people living today chasing their money because the realities of what it takes to survive just isn’t adding up. There’s really two scenarios here: spending more than you make on necessary expenses (like food for your family) vs. optional expenses (like traveling or a fancy car). If you are in the first category, while a budget is absolutely a useful tool, the problem isn’t untracked expenses, it’s a larger “in vs. out” problem. I’d be encouraging you to focus all your attention on getting a higher paying job - either via upskilling, taking on a side hustle, or negotiating a raise. Beyond this, adjusting down major expenses, like trying to negotiate lower rates on debt or downsizing in terms of your apartment or car would be far more important than tracking your spending at the coffee shop.
Now on the other hand, if you’re spending more than you’re making on incidentals or quality of life items, a budget could help. It can help you see how the numbers don’t add up and something in your life has got to give. Is the budget going to change your emotional spending for clothes or make it easier to say no to a girls night out because you want to make your budget work? No, that’s outside the budget and more into money mindset, but the budget can be a foundational stepping stone to getting clear and making a plan.
Q: How do I budget if my income is inconsistent?
A: As a solopreneur, I’ve lived this life my friend. If your income is inconsistent because you work in projects, for yourself or because of seasonality, the easiest method is to look at an average of your income over the past 6-12 months and budget off that. Higher earning months will need to sock some money away in savings so prepare for lower earning months.
If your income is inconsistent because you’re in a crisis situation, out of work or other more big picture instability, I know how stressful that can be and while I applaud your proactivity reading this article, and I’m sorry you’re in this situation. Don’t stress about a budget right now. Focus on stabilizing your life, whether that’s moving back in with family, getting a new job or just getting your feet underneath you and the more minute tweaks of budgeting can come once you’ve righted the ship.
Q: What if I go over budget in a category?
A: First, don’t be too hard on yourself! Review what caused you to overspend - was it a fluke or a consistent behavior? Then the question is, do you need to adjust your budget to be realistic about this category moving forward? The numbers still have to add up to less than your income (otherwise we’re going into debt, which we definitely don’t want) so you may need to pair this adjustment with both a category change in your budget and much more importantly, different decisions in your spending habits to affect your spending accordingly. All that matters from this experience is that you learn from it!
Q: Are budgeting apps really effective?
A: Yes, they can save you time and effort! Many budgeting apps offer automatic tracking and categorization of expenses, which simplifies the entire budgeting process. Many experts say that seeing where your money is going will help you make different spending decisions - I only see this somewhat, at the end of the day, we still have to do the mindset work to change our decision making (especially around emotional spending) but having clarity on how a category of overspending is making your budget impossible to add up could certainly be a reality check.
What does success look like in budgeting?
A budget can get you to a place, after you’ve gotten the hang of it, where you are back in control of your money because you’re clear where things are going and you’re able to make intentional tweaks to invest more, for example, or to save for a move, because you’ve eliminated emotional spending or because you’ve started planning for unexpected expenses, preventing yourself from having to use credit card debt to cover it.
It also might point out the most important thing for you to be working on outside your budget - whether that’s increasing your income, paying down debt or managing late payments. The budget won’t fix this but it will point you to the most important things to be dealing with.
If nothing else, a budget should help you feel informed, where there’s not some big unknown floating around your money. You may not like what you see (although I hope after 6-12 months, you’ve been able to make adjustments to feel more comfortable) but you won’t be living with your head in the sand, ignoring what might be coming next.
Budgeting is one path to financial freedom
Managing our finances is an ongoing journey. Budgeting alone isn’t going to set you up for a life on the beach but it certainly can give you more information to put you on a path to greater financial security. I deeply believe that it can feel empowering if you use it correctly: first to get clear on today, then to plan for tomorrow and finally to begin implementing that plan in your decisions outside the budget. When you get all three of those phases in motion, momentum kicks in and that’s where you might start to be like me, actually enjoying the act of budgeting.
Budgets are as useful as we make them. Using them to beat ourselves up, only makes things harder. But being patient and a little kind to ourselves as we get a more thorough understanding of our current situation and coaching ourselves to where we want to go is how we create what we want in our financial lives and beyond.
