Nearly half of Americans faced financial difficulty last year, unable to afford bills for basic needs like medical care or housing. Almost a third live day-to-day and have no savings at all.
Their current financial woes aren't all attributed to foolish spending habits. Some simply fell victim to common money mistakes that the majority of Americans make – even the ones who still have gas in their car, food on their table and clothes on their backs.
Could you be making these money mistakes too? Your future financial security depends on it.
Budgeting is essential to managing money well. Without a budget, careless spending can run rampant. However, when purchases are accounted for in a budget, it's near impossible for those unnecessary or impulse buys to go unnoticed. Setting a budget each month allows you to plan ahead for purchases, while maintaining a budget from month to month can provide valuable insight into your unique spending behavior.
If past budget behavior indicates that you tend to stray away from your budget, it then becomes a useful tool to exercise control over your spending. Examine which type of purchases seem to throw you off, and then make an effort to trim back on those.
However, difficulty sticking to a budget isn't always the fault of your spending behavior; in fact, it might be due to your very budget behavior. Tracking too little or too much can be detrimental to a budget. Tracking too little, like by only adding in significant or expected expenditures, can leave your budget vague and useless. Attempting to track too much by adding in every single purchase can leave you exhausted and frustrated. So how do you find the sweet spot between too little and too much?
Stop for a coffee on the way to work one morning? No, don't bother to add it in your budget.
Stop for a coffee on the way to work every morning? Yes, that needs to be in your budget.
If you aren't sure whether to include it in your budget, ask yourself if the purchase is one that happens out of habit. A small, one-time stop doesn't constitute a habit, but if it becomes a routine occurrence, then it should be accounted for in your budget.
Expected expenses like mortgage or car payments should be one of the very first few things calculated into a budget. These are easy to add in because the amount generally doesn't change from month to month.
Failing to plan ahead by not calculating these routine expenses at the beginning of each month will only make budgeting more difficult. Subtracting them out first provides you with an estimate of how much income you'll have left over for discretionary purchases.
These expected expenses aren't just limited to payments to other people—they also include payments to yourself. Get in the routine of making monthly contributions to savings and an emergency fund, and calculate those into your budget just like you would mortgage or car payments.
The point of establishing an emergency fund is to expect the unexpected. Experts recommend saving up at least six months of living expenses in an emergency fund, set aside solely for sudden costly emergencies. Contributions to savings accounts, including retirement accounts, should account for 10 to 20 percent of your income each month, depending on your unique financial situation. It's important to ensure there's enough money to first to pay your bills, and then pay yourself.
Just because you have a budget doesn't mean you can't have a little fun.
All too often, however, the words "budget" and "boring" are nearly synonymous. This is because many misconstrue the point of budgeting as being strict, not specific, when it's really the other way around.
If you set your budget at the beginning of the month by allocating your income into meticulous categories and not budging on miscellaneous expenses as the month goes on, you're being strict.
If you set your budget at the beginning of the month by allocating your income into distinct categories, with some additional allowance left for miscellaneous expenses as the month goes on, you're being specific.
Organize your income into three general categories:
Leaving a little room for miscellaneous purchases in the "Wants" category means you'll still be able to budget effectively while having a little fun, too.
Budgeting isn't easy. It can be difficult to get in the routine of allocating your income each month and even more difficult to stick to it. Go into budgeting knowing that mistakes will happen, and be flexible enough to make adjustments along the way. It's okay to make mistakes; that's how you'll determine what works best for you. If you overspend or overestimate, learn from your mistakes to try to improve the following month.
Just don't give up.
Giving up after the first mistake is a like vowing to never ride a bicycle again after you've fallen off for the first time. Like any other skill, budgeting takes practice. It takes time, dedication and hard work, but once you get the hang of it, it'll all pay off in terms of future financial security.