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Major Budgeting Mistakes Every Beginner Makes

Posted by : Premraj | Posted on : Friday, November 20, 2020

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When you are new to managing your money, you are going to make a number of mistakes — and for the most part, that is as it should be. Every mistake you make, you will learn more about your budget, your behavior and your best practices. While you shouldn’t set out for failure, you should be eager to find flaws in your financial plan and correct them, so you can gain as much knowledge and power as possible.

To that end, here are a few of the biggest budgeting mistakes that most beginners make. If you find that you are committing any of the following financial sins, you should alter your plan immediately.

Forgetting Income Tax

Plenty of beginners try to take their annual salary and divide it by 12 to get a monthly income to budget around. There are several problems with this strategy, but perhaps the biggest is the issue of tax. Most employees use tax withholding on their paycheck to avoid penalties and enjoy a sizeable tax return. if you are self-employed, a contract worker or otherwise unable to withhold taxes from your paycheck, you will need to pay estimated taxes every quarter. Ultimately, your salary isn’t necessarily your income, and neglecting to factor income tax into your budget could make your life particularly brutal come tax season.

Neglecting Emergency Funds

You can budget every penny of your cash flow — but you do need to have some savings in reserve in case of emergencies. Emergency funds can be used for health crises, home catastrophes and any circumstance where you have unexpectedly high expenses and not enough money in your checking account. Different financial gurus advocate for having different amounts of emergency funds; you should watch your important expenses, like rent and utilities, and save up enough to have between six and eight months of expenses in a savings account.

Skipping Fun

Plenty of financial gurus advocate for living frugally, but too many beginner budgeters interpret that to mean cutting out all potential for fun. If you strip your life of all sources of enjoyment, you aren’t budgeting correctly. If your budget is making you miserable, you are less likely to adhere to it and more likely to cheat, binge or otherwise make a major spending mistake. The primary function of your budget is to help you gain greater satisfaction from life, so you should leave in some expense space for your favorite things.

Never Revising

A budget is not a set-and-forget document. You should constantly be engaging with your budget, using it to track spending and saving and watching it for signs of improper financial behavior, and you should also be tinkering with your budget, revising it as your life and financial goals shift. Some key ways to adjust your budget include:

Keeping categories current. You should eliminate expense categories you no longer use and add categories that are new.

Updating income. Earning a raise, changing jobs or acquiring a side hustle are all budget-worthy.

Including new goals. As you get older, your financial priorities will change. You might need to add new goals like saving for a child’s college fund or boosting retirement contributions.

Going Long-form

You don’t need a fancy money management software to build and maintain a budget — but it certainly helps. Long-form budgeting is hard work, and though some people find the extra effort worthwhile, you probably don’t want to give yourself so much responsibility right off the bat. You shouldn’t feel guilty about automating some aspects of your budget, especially if it helps you stay accountable to your spending and saving goals.

Relying on Estimates

Generally, you want your budget to be as accurate as possible. Though it might be convenient to guess about your income and expenses, your estimates don’t give you a truthful picture of your financial situation. This is why connecting your financial accounts to a tracking software can be so useful; it allows you to see your income and expenses affect your budget in real time without the headache of double-checking your financial accounts and participating in manual entry.

Budgeting isn’t easy — but it isn’t terribly difficult when you know how to do it right. With the right budgeting tools and the right mindset, you can avoid the most disastrous mistakes and get on the fastest path to financial freedom.

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