Budgeting is one of those terms you hear a lot concerning personal finance, but a concept that can take years to comprehend genuinely. Month after month, people create budgets yet fail to stick to them and ultimately give up altogether. As having an accurate visual of your income, expenses, and savings is essential to financial success and security, giving up shouldn’t be an option.
Where Am I Going Wrong?
If you’ve been trying to stick to a budget with little to no success, the better question to ask yourself is, “Where am I going wrong?” or “Is alimony taxable income?” If you can identify problems within your budget, you can make corrections that will enhance your financial future. Not sure where to start? Below is a look at some of the most common budgeting mistakes and practical solutions to put you back on track.
Counting Gross Income
Your gross income is how much money you make in a period before taxes and other deductions. Commonly, people use this amount when creating their household budget.
Financial Impact: Using your gross income will cause you to include money you don’t have. If you earn $60,000 a year but only bring home $40,000 after taxes and other deductions, you could throw your budget off balance. You’ll make a financial decision based on $20,000 that you don’t have, causing financial strain.
Solution: When creating a monthly budget, it is useful to use your paystub and calculate your net income or take-home pay. If you’re an entrepreneur or freelancer, your income is the amount of money you have after covering business-related expenses.
Improperly Tracking Expenses
The second part of creating a budget is calculating your expenses. This is the amount of money you spend on the cost of living and other items. Unfortunately, most people fail to track their spending correctly.
Financial Impact: Improperly tracking how much you spend could cause you to spend money you don’t have and, eventually, overdraft your checking account.
Solution: Beyond reviewing your bills, statements, and receipts, finding a bank account with fee-free overdraft protection can go a long way to helping you out here. For example, this free online banking company provides extremely generous overdraft protection.
Not Preparing For Unexpected Expenses
Life would be much easier if everything went according to plan, but it doesn’t. There are times when things arise that require a surplus of cash. Believe it or not, many people aren’t financially prepared for such an outcome.
Financial Impact: What happens if the car breaks down, the plumbing backs up, or you’re out of work for a few weeks due to an injury? If you haven’t budgeted for unexpected expenses, you’ll either struggle or accumulate unnecessary debt.
Solution: Everyone should have a rainy day fund that has at least three to six months’ worth of expenses in it. That way, if something comes up, you have some wiggle room and money to resolve the matter. Start setting aside a few bucks every week just for emergencies.
No Room For Fun
While having enough money to cover your monthly expenses is crucial, you can’t forget to budget for pleasure.
Financial Impact: When all your money goes to bills and necessities, you start to feel restricted. Such feelings could cause you to stop budgeting altogether, leading to your financial demise over time.
Solution: There’s nothing wrong with having a little fun. After all, you’ve worked hard for it. When creating your budget, feel free to set aside some cash for entertainment and fun. Whether you save $50 or $100, use that money to do something that brings you happiness. It encourages you to stay on track financially and limits the likelihood of making impulsive purchases and poor decisions.
Whether you make $25,000 a year or bring home six figures, you need a budget. It’s a financial management tool that helps you keep track of your income, expenses, and savings and make informed decisions for a secure future. If you’ve been unsuccessful with budgeting over the years, perhaps a reevaluation could produce better results. Consider the common mistakes and their financial impact and implement practical solutions like those listed above to turn things around.