Like many goal-setters at the start of a new year, you rely on a budget to help you make changes to your finances. If you’ve never made this spending plan before, you can easily fall for these two mistakes.
Mistake #1: Not Saving
Living without a savings account is one of the biggest mistakes you can make — no matter where you are in life. Whether you’re just starting out or earning a six-figure salary, everyone runs into bad luck occasionally. Your emergency fund helps you weather these storms of bad financial luck with less stress.
Fix #1: Automate Monthly Contributions
The only way to build your emergency fund is by socking away cash, little by little, each month. Make your savings part of your monthly budget, earmarking a big of your paycheque for this purpose.
Automating your savings takes the onus off you to remember to make these contributions — your bank will move the money on your behalf instead.
To give your emergency fund an added boost, consider sinking windfalls into this account, too. The occasional, large lump-sum deposit can help your smaller monthly payments grow.
Fix #2: Borrow Money Online
What if you’re dealing with an unexpected expense right now? In urgent cases, you can’t wait to collect monthly contributions — it would take too long to save up what you need. You have to respond right away, regardless of what’s in your bank account.
Mistake #2: Spending Too Little
Plenty of people mistake a budget for a strict spending plan that culls all expenses except the essentials. They associate every budget with extreme frugality and sacrifice.
This budget philosophy is hard to follow. Besides which, making drastic changes to your budget isn’t practical. You can’t expect yourself to never spend money on fun things!
Fix #1: Appreciate Balance
A budget is all about striking a balance in your monthly spending so that you don’t go too far in either extreme — spending no money at all or spending too much of it.
Instead, the best budgets help you figure out what you need to cover your essentials so that you can put a limit on discretionary spending. Keep this in mind when you make your budget. Rather than claiming you’ll never get takeout again, set yourself a realistic limit of one takeout meal a month.
Fix #2: Follow a Budget Method
If you aren’t sure what a practical limit on fun spending looks like, check out the 50/30/20 budget. This budget provides a basic breakdown of your spending according to three main categories:
- Needs: The essentials should get 50% of your take-home pay.
- Wants: Fun spending gets 30% of your paycheque.
- Savings: You should reserve 20% for your savings and debt payments.
You can tweak these numbers to suit your lifestyle. After all, some people who have a high cost of living might spend more than 50% of their income on housing costs alone. You may also have a big resolution that prioritizes debt payment, so you want your savings to take a bigger of the pie.
Customizing your breakdowns is fine — just follow this basic guide that prioritizes the majority of your income for needs.
The Takeaway:
There’s more than one way to fix your mistakes. Follow these tips as a rubric when you start budgeting for your New Year’s resolutions.