Top 5 Budgeting Mistakes and How to Avoid Them

Budgeting is one of the 5 key pillars of financial literacy.  A budget is a proactive and realistic plan that outlines all your spending each month. It is impossible to get ahead financially without tracking your spending and having a good grasp of your finances, at least on a monthly basis. 

And yet millions of Americans fall prey to common budgeting mistakes that hold them back from achieving financial freedom. In this post, we’re going to break down why most people fail to have an effective budget and steps you can take to fix this!

1. Not differentiating between needs and wants

One of the main reasons you should have a budget is to know where each dollar you earn is going so you can prioritize your expenses. 

Not all expenses are created equal. What we’re talking about is needs vs. wants. 

Needs are necessary for your survival or maintaining your standard of living. Think shelter, food, and clothing. (And maybe coffee, if you’re anything like us!) 

A want is not essential but it makes life easier and more enjoyable. Think, going to a restaurant, or a movie, or buying a Louie Vitton handbag. It’s not bad to have wants, we do want to LIVE after all, you just need to budget for it.

ALL of your needs and wants need to be accounted for in your budget, otherwise what’s the point? We want this to be as realistic as possible.  

But here’s the trick. A need has to be paid first. We’d rather you have a roof over your head than an overpriced handbag. I know, we’re mean!

A smart budget prioritizes needs over wants so that you don't have to compromise on groceries just because you maxed out your credit card on online shopping!  While you cannot avoid paying the monthly rent, a fun trip to Vegas can wait… until you’ve properly budgeted for it!

2. Not having a written budget 

What is not written (or tracked online) is easily forgotten. Yet, according to a Gallup survey, only 1 in 3 Americans follow a detailed written budget. 

We are least likely to follow a budget that exists only in our minds. A written budget is easier to remember, refer to, and follow. For instance, on any given day, a written budget shows how much spending money you are left with for the rest of the month. 

If you don’t jot down your spending plans or your expenses, you will have no clue about whether you are overspending, which most Americans do, or are on track to fulfill your budget goals. 

A written budget does not need to be maintained on pen and paper. uThrive Academy makes it easy for you and gives you all the tools you need to start budgeting with our ultimate personal finance course. 

3. Not leaving wiggle room

Are you on a shoestring budget that leaves you no wiggle room for unexpected or unplanned events? Some signs that your budget may be “too tight” include juggling when and what bills to pay, skipping savings plans, and living paycheck to paycheck. 

It is difficult to follow your spending or saving plans if your budget is too tight or leaves only a small percentage for planned spending. Who doesn’t want that occasional overpriced drink at Starbucks while you’re out shopping?

After all, what’s the point of working hard and earning money when you can’t enjoy your life? 

We hear you Gen Zers. We agree you should live in the moment–to some extent–we’re just asking that you build it into your budget!

A good budget is realistic. It must not be too tight that you eventually give up. Keep a line item for unplanned expenses, so that when you go over your, let’s say, $250 restaurant budget by $50 for the month, you’re not running to the credit card to cover you. This will be easier to follow while staying motivated. 

A realistic budget must keep space for those occasional lapses - a few dollars of unplanned expenses here and there. 

4. Not planning for emergencies

Only 44% of Americans can afford to pay a $1,000 emergency expense from their savings! Less than half y’all! I’d say we have a nationwide savings problem! 

Here’s the thing. No one plans to lose their job, or to have expensive car repairs or medical expenses, but it happens, so you need to expect the unexpected. The average cost of 1 emergency room visit is around $2,400 to $2,600 (without health insurance… and that’s a whole other topic for another post)! 

We’ve already discussed that individuals without emergency savings often experience higher levels of financial stress, which can be linked to anxiety, depression, sleep loss, weight loss, etc. 

This also leaves you in an incredibly vulnerable position that could lead to a cycle of debt that’s hard to break. Without savings to cover emergencies, people may resort to borrowing money, using credit cards, or taking out loans at high-interest rates. 

I want to help you avoid this. 

Experts recommend that you need to have 3 to 6 months worth of expenses saved in a separate rainy day fund–that you don’t touch–so when that emergency happens, you’re ready. And again, it’s hard to know what 3 to 6 months worth of expenses are without tracking your spending and budgeting.

It is imperative that you save as part of your budgeting so that this is easier to achieve, one deposit at a time! We can help you put a plan together to make this attainable.

5. Ignoring the small expenses

About 250 years back Benjamin Franklin warned us, “Beware of little expenses - a small leak will sink a great ship." While setting a budget, it’s a common tendency for people to ignore small expenses like the daily cuppa or snacks costing a few dollars a day. 

We all have them. Your daily dose of Starbucks at $7 bucks a pop! Your numerous  subscription plans you signed up for and frankly forgot about. The Uber Eats delivery fees! The list goes on. These can quickly add up over a month and make a big impact on your monthly budget, particularly if it’s tight to start with. 

Make it a practice to count every expense, no matter how small in your budget to reflect the true state of your monthly outlays. If a daily expense seems too small, just multiply it by 30 to know its monthly impact on your budget. Oh, and be sure to cancel the subscriptions you’re not using!

We know that budgeting gets a bad rep, but we’re here to help you make a realistic plan so you can start reaching your financial goals. It’s actually a lot easier than you think. Get started today with our ultimate finance course, which teaches you how to earn an income, budget, save, invest, and protect your assets!