Not having a budget could be the worst financial mistake you ever make in life.
A budget helps you understand how much money is coming is your household and how much is going out via expenses.
And a budget can tell you where you are wasting money and what you need to sacrifice to achieve a financial ambition.
But there are many ways you can mess up a budget without even realizing it.
Here are four budgeting mistakes you must avoid to have budgeting success.
Forgetting to calculate income tax deductions
Whoever said that “you can’t take it with you,” was probably talking about income taxes.
But the same idea can be applied to your personal budget-making. When you are calculating your own personal budgets, always compensate for income taxes. Otherwise, your whole budget will be incorrect and moot.
Depending on where you live and your annual income, you have an income tax bracket or tax rate based on I.R.S. brackets.
If you have a $50,000 income and are single, your highest tax rate is probably about 22% (your effective tax rate may be lower). That means your personal budget should have a starting point of $39,000, not $50,000.
Never adjusting a budget
Keeping a budget is hard. No one denies that. But a budget is never a one-and-done kind of document. You must revisit and readjust your personal budget often to account for changes in your finances.
Did you lose a job? Perhaps you started working two part-time side hustle gigs and started earning more money. Did you earn a tidy profit from an investment? Are you splurging on new expenses?
Then you have to change and adjust your budget. The initial budget you made is useless if it does not account for the new changes in your personal finances.
Try to revisit your budget on a weekly or monthly basis at least.
Guesstimating a budget
When you make a budget, you must document your finances in exacting detail.
You should never guess or make ball-park estimations when it comes to your finances. (And do you have any idea how big a ballpark is anyway?)
Calculate your budget exactingly to the penny and never make guesses. Otherwise, you may as well guess how off your real budget is when you have a cash shortfall after paying your expenses.
Unrealistic spending plans
It takes time to get the things we want. And having a good budget means you can see where you are wasting money and where you need to make some sacrifices.
But the sacrifices you make should be realistic. For example, you could try to go without eating lunch at work to save money. However, if you fail to do so, you then have to go back and readjust your budget.