We all like to think of ourselves as intelligent beings who know when to stop spending and save for the future, yet ask people how much is in their savings, or how much they spend on food every month, and most will give you a blank stare.
I should know. I’ve been there and I’ve talked to dozens of people in that position. Here are 9 of the most common mistakes I hear from them:
1. “Save As Much As Possible”
This is what most people believe. “Why budget?” they ask. “Just save as much as you can.” There are two problems with this approach:
First, you’ll deprive yourself of what you really want in life. Want to travel or learn a new language? “No,” you tell yourself. “I need to save money for the future.”
And second, because you’ve deprived yourself of these things, you’ll create an illusion that you’ve saved a lot. You’ll assume small or irregular expenses don’t matter. “So what if I bought a dress when I didn’t travel?” It’ll be fine if you only bought one dress, but because that dress is so insignificant, you forgot about it just 48 hours later.
Guess what you’re going to do the next time you see another dress you like? And thus the cycle of spending continues.
Why does the cycle of spending continue despite the fact that we want to “save as much as possible”? Here’s why: there is no context to what you’re saving for.
So start with an end in mind (what are you saving for?), and then forecast into the future. At the end of each month, compare your progress to your forecast and look at the difference. Do you need to save more? Do you need to save less? Do you need to cut down a particular expense?
3. Wanting It All
Yes, you’ll probably have to cut something. Assuming that you can continue living as you do is one of the most common mistakes I see people make. Budgeting requires sacrifice, but there is good news…
4. All Expenses Created Equal
When you are deciding what to cut down on, consider the impact it will make on your life.
The fact that it costs a lot of money doesn’t mean you should immediately cut it out. Some people love their homes, so they spend more on rent, but cut down on food and other expenses – and they end up a lot happier than vice versa!
5. Assume Everything Will Work Out
It’s great to budget for what you’d love to do in the future, but make sure you also take emergencies into account.
The last thing you want is to save $5,000 for a major purchase, only to spend half of it fixing your car’s engine when it suddenly dies on you.
6. Going Solo
Coming up with a budget is easy. Sticking to it is the hard part. So if you want to maximize your chances of success, make sure you consult with the people around you – people like your spouse.
The more the people around you buy into your budget, the likelier you are to succeed.
7. Focusing on Technology
It’s almost inevitable that people would ask for my recommendation as to which software to use to budget. They will then go into procrastination mode while they compare all the available solutions out there. Here’s the truth: it doesn’t matter!
The point is to start easy and start immediately. Use pen and paper. And you can always upgrade later. The most important part is to change your mindset.
This is especially true if you’re freelancing or working in your own business. In fact, it’s not uncommon for people to go bankrupt because they forgot to account for taxes – which depending on where you live, can go as high as 50% of your earnings!
9. Hope Budgeting Will Solve All Your Financial Woes
A financial guru once said that you can’t budget your way to wealth. How true it is!
If you’re earning $10,000 annually and you’re living in the U.S., no amount of budgeting will get you out of poverty. You have to make more money.
But that’s another conversation.