Proper budgeting is an essential ingredient for financial success. Do it right and you will be in control of your money. The good news is that creating a budget that works is neither painful nor difficult. The trick is to avoid the most common mistakes that discourage even the most well-intentioned budgeter.
Mistake No. 1: You don't track spending.
A lot of budgeting processes are overly general and will have you list your monthly bills and estimate reasonable amounts for other things, such as lunches, gas and groceries. The problem with such a general approach is that your estimates may be way off base. Marsha Baker, a professor of consumer finance at Lindenwood University in St. Charles, Mo., explains, "A lot of people are absolutely amazed as to where they spend their money. They have no idea that their daily coffee habit adds up quickly or that going out every weekend pushes them beyond their means."
You must track your spending for at least one or two complete months before creating your first budget. There are high-tech and low-tech ways to do this, but the bottom line is you have to take a clear-eyed look at where your money is going. If you're a fan of pencil and paper, you can download a free monthly spending chart (or two) from GetButtonedUp.com. Keep a copy in your wallet or purse, stick a copy on the fridge and put one on your desk so you're always ready to jot down what you spent right away. At the end of the month, tally it all up on a fresh worksheet. If you're more digitally inclined, there is no better free tool than Mint.com. Register for free to create your account and link all your bank and credit-card accounts to it easily. Just remember, though, unless you pay for every single thing with a linked debit card, you will still have to manually input cash expenditures so you can track them, too.
Mistake No. 2: You mingle fixed and variable expenses in the same accounts.
Fixed expenses, like mortgages and car payments, recur every month with little to no variation in the amount due. Variable expenses, like groceries and entertainment, fluctuate. By mingling fixed and variable expenses in the same account, you increase the complexity of managing your money and budget unnecessarily.
Lee Roesner, developer of the MoneySlinger Speed-Budgeting Personal Finance System, advocates managing each of these two groups independently by first determining the average monthly cost for each group of expenses: fixed and variable. He explains: "These two figures simply become monthly deposits into two separate bank accounts; each dedicated to one of these groups. Throughout the month, individual expenses are paid out of each account accordingly." Untangling the two accounts makes your budget far easier to manage.
Mistake No. 3: You consider savings last.
Too many people think about saving last, when in reality, it should drive the budget.
Amy Suardi, author of Frugal-Mama.com, advocates what she calls reverse budgeting for savings. She explains: "You put as much as you can into savings at the beginning of the month, and then you let things work themselves out for the rest of the month."
Mistake No. 4: You forget to take into account expenses that recur irregularly, but frequently.
Some expenses come up for everyone every year, or quarter, and if you fail to plan for them, your budget gets stressed and often you incur debt to meet the unexpected expenses -- a budget-breaker, for sure.
Marsha Baker, a CPA, advises tallying up these recurring non-monthly expenses, dividing them by 12 and depositing that amount into a discretionary savings account on a monthly basis. If you get a paycheck directly deposited, split the deposit accordingly so you don't have to think about it, or just sweep the amount into a savings account each month.
Mistake No. 5: You don't comparison shop.
If you're not in the habit of comparing before you buy, you're throwing away money that could be channeled into discretionary or emergency savings funds. You are also more likely to engage in budget-busting impulse buying.
The Internet has made it easier to get what you need and stick to your budget, so before you head anywhere to buy something, check online first. Many times retailers have better deals online than they do at their stores. In addition, websites like KeyCode.com compile promotional codes for everything from tax software to baby furniture from all the biggest retailers. Sites like GiftCardGranny.com sell gift cards for up to 35 percent off the face value and you can find discount gift cards for most any purchase.
The bottom line: If you're not comparison shopping, you're hurting your bottom line.
(The writers are co-founders of Buttoned Up, a company dedicated to helping stressed women get organized. Send ideas and questions to email@example.com. For more columns, go to scrippsnews.com.)