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Most people think budgeting is about money. It’s not, really not. Budgeting is really about life goals. Money is simply the tool that a budget uses to achieve those goals. Before creating a budget, ask yourself, “What am I budgeting for?” A common answer is that you budget so that you can save money for something in the future, such as a car, a house or your retirement. This is the first mistake most people make.
Instead of just budgeting for your future, budget for your present as well. You should budget to ensure that the life you now lead is fulfilling and that you flourish as a human being. Planning for retirement alone is like giving up on this life and waiting for the next one to come as soon as possible. Here are four additional budgeting mistakes you may be making:
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1. Make your budgeting goal a dollar amount
The purpose of a budget cannot be to spend or save a certain amount of money. That doesn’t make sense. The goal should be what you spend or save money for. It is completely illogical to set aside a certain amount of money without knowing why you are putting that money aside, yet this is what most people do.
Before you start saving for a house, you should have some idea of what the type of house in the area you want to live in will cost. If you’re saving for retirement, you need to have some understanding of what you need to have saved by the age you plan to retire in order to afford the lifestyle you want to live. When you start a business, you need to know in advance how much you will need to spend. The goal is never the dollars; it is the purpose or reason behind the dollars.
2. Ambitious budgeting
To create a budget, you need to start with how much money you are currently bringing in monthly. This may seem obvious, but the amount of income you include in your budget should be it actual amount you earn, not what you hope to earn. Too many people use a higher amount than they actually earn when creating a budget because they expect to earn more than they do now. Sometimes this is even based on reliable data, such as historical bonuses or salary increases. However, it is always possible that you do not make what you expect, in which case you will not have earned enough to meet your budget and you will end up in debt. Always base your budget on what you are currently making. That way you have a surplus when you eventually earn more, which is never a bad thing.
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3. Budget backwards
This is how most people make a budget: they add up all their expenses (e.g. rent, car payments, clothes, school, etc.) and subtract that from the amount of money they earn to see what, if any, is left over. The remaining amount is split between savings, retirement, investing in a business, etc. However, this is completely backward and leaves most people with very little.
Instead, you should start with the amount of money needed to achieve your goals. Then the amount that remains is divided between your daily necessities. For example, if you are an artist, you first need to figure out how much it costs to be a successful artist: materials, supplies, distribution costs, branding and marketing, social and digital media, etc. Once you figure out the cost of being an artist, your income, then what you have left to spend on rent, food, clothing, etc.
4. Forgetting to invest in yourself
We tend to prioritize budgeting for the material goods in our lives: a bigger house, nicer car, expensive clothes, jewelry, etc. While these things may bring temporary joy, the truth is that they do very little in terms of of long-term happiness. or create a satisfying life. Before you spend more than your basic material needs, invest more in your well-being and experiences that will help you thrive as an individual. For example, budgeting for your continuing education and developing new skills, creative endeavors, and relationship building are all ways to invest in your happiness.
Related: What Steps Can the Average Person Take to Save Money?
So if you are currently budgeting or just starting to create a budget plan, make sure you don’t make the four mistakes above. If you really want to see success in budgeting, make sure your goal is not a dollar amount, base your budget on what you currently earn, start with the amount of money it takes to reach your goals, and don’t forget to invest within yourself.
