How many mistakes have we made with budgeting? and the regrets that we have for not fixing these mistakes sooner, because even though planning and tracking our income, our expenses, and all that stuff is good, in the long run, over many years, budgeting the wrong way can actually cost you more money than it saves you. So, in this blog, I’m going to list the five biggest budgeting mistakes I was making and how I fixed them with a few simple changes, so that blog readers can hopefully get some better ideas about how to manage their own money as well.
1. Cutting Back on the Wrong Expenses
We’ll get right into it with Mistake Number One. This first budgeting mistake is one that I see a lot of people making without even realizing they’re making, so I’ll explain what I mean. That mistake is cutting back on the wrong expenses. So I don’t know about you, but I’ve seen countless videos on YouTube and over on TikTok that show what happens with the money that you save when you cut something that’s relatively small, like maybe your favorite latte that you’re buying twice a week.
I won’t bore you with the math here, but basically what these videos say is that if you spend something like maybe five bucks on each of these lattes, or roughly $10 per week or $520 per year, what if instead you saved that money and then invested it? Then they show you the magic of compound interest and how, over the next 50 years, those savings from not buying that $5 latte twice a week will grow to somewhere over $200,000. Now again, that sounds very clever because the math is all true, but the problem is that our natural behaviors as humans just make hypothetical strategies like this highly impractical and not realistic.
I mean, if you’re someone who loves buying lattes and it’s one of those cheap, tiny little everyday joys that maybe helps to start off your day right, then I would say why would you cut it out? The bad thing with the whole “cut this and invest instead” argument is that you can always take it one step further. So if you’re cutting out a $5 latte, then why not also cut out your $15 Netflix subscription too? And while you’re cutting out those things, how about you just forget about buying any holiday and wedding gifts? Because then you can think about how much extra you could save and invest.
But we all should know that that’s just not how life is lived. I know that I want to add value to my life through my experiences and what I spend my money on. And I know that the more I cut, the fewer those little things become, and the less enjoyable life becomes. So instead, I’d rather plan for and then count on those smaller expenses and cut back where it really matters, which brings me to the big three expenses. Now, these are the ones that you’re probably very familiar with because they are the largest ones that most of us have. And those are going to be housing, food, and transportation.
Now all these expenses are going to vary depending on where you live, with cities obviously being more expensive in general. But the weird thing that I’ve found and learned about is that because these three things make up such a large portion of our budgets, we sometimes have a weird psychological tendency to actually overspend on these larger expenses when we don’t have to. So think about this. Let’s say you’re going to be renting an apartment. Maybe you’re looking at a place for one bed and one bath for $1,700 a month. But then you see another place for $1,800 a month, which is only an extra $100. Now there’s not much of a difference between these two places; they have the same square footage.
They’re both in a good location, and they have everything you need with a washer, a dryer, a dishwasher, and all that stuff. However, the $1,800 one appears to be more updated, with nicer colors that make the space feel a little brighter. So you say to yourself, “Well, I was already going to spend $1,700 for that other apartment.” So what’s $100 more when I’m already spending this much? And it’s this attitude towards those extra costs for these already larger expenses that really adds up and should be the first place you look to cut back on when it comes to budgeting and saving money.
So that $100 extra per month in rent becomes an extra $1,200 per year in additional living costs, which is actually twice as much as we could have saved if we cut out those $5 lattes like we just talked about. Another example of this is the mistake that I made when I was trying to save money a few years ago. After I was done with college and started earning some income, I was so focused on saving money with the little things, like buying store-brand food items and not eating out at restaurants as much. And don’t get me wrong, I was able to save a few dollars by doing all that.
But when I needed to buy a car to drive to my first job, I went over to a car dealership a week after graduating and bought a car that was less than two years old without even considering the price as much as I should have. Now, luckily, I was fortunate enough to live at home for a year to save on my housing expenses as I drove that car an hour and 15 minutes each way to my job every day. But I think I paid around $17,000, which was just too much looking back at it since I had very little in my bank account at that time. It wasn’t until a few years later that I eventually realized I could have easily saved several thousand dollars if I just bought a less expensive car and was willing to look a bit harder for something that was still reliable, but maybe a bit older with a few more miles on it.
The point here that I learned from this first mistake is to focus on saving money with those larger purchases and larger monthly expenses, especially with those big three expenses of housing, food, and transportation. If money is really tight, you can cut out those smaller expenses every now and then, but make sure that you also take action on those things that will have a much larger impact on your budget. And that brings me to budgeting mistake number two that I made.
2. Focusing too Much on Expenses and not Enough on Income
This mistake is something that takes more effort and more time to fix, but that means focusing too much on expenses and not enough on income. To get straight to the point with this one, it’s important to understand that there is a limit on how much you can save and cut back on your monthly expenses, but there’s no limit on how much you can earn from one or several streams of income.
And I mean, when we think about budgeting, the first thoughts that pop into our heads are things like, “What expenses can I eliminate?” or “How can I find bigger discounts?” or stuff like that. But honestly, after you really look at those three big expenses, it can be tough to find additional meaningful ways to cut back on your spending. You can obviously cut back on shopping for things like clothes, electronics, or whatever else you might not really need. But at some point, you run out of things to save on because we all have to spend at least some money to live.
Once we’ve eliminated any excess spending, the only other way to increase that savings gap between our monthly income and our monthly expenses is by finding a way to actually increase that income. Increasing your income is easier said than done. And in many cases, earning more is just not going to happen overnight, which is kind of what causes some people to not take any action. So for me, this was probably the biggest mistake that I worked to fix for several years. But the same thing was true for me—increasing my income just did not happen that quickly.
And that’s because the problem that I faced was that I was fresh out of college. I didn’t really have any experience yet. So my starting salary at that first job was not something that I had much room to negotiate with just yet. I worked as hard as I could and gradually began to receive standard two- to three-percentage-point raises during my first few years at my job. But I knew that, for the most part, the increase in my salary was just keeping up with inflation back then. So I wanted to find other ways to increase my income to sort of supplement that. I sold stuff on eBay, tried out a little bit of e-commerce, and some other things like that, but eventually, after learning as much as I could in my free time and experimenting with different things, I actually found content creation to be a very real side hustle opportunity when I started blogging back in January of 2021.
So from my own experience, I can honestly tell you that you should not just dismiss your own thoughts about increasing your income by using the internet because there really are so many opportunities out there. It does take the time upfront with almost any side hustle, but trust me, blogging is real proof that it’s possible to earn money on your own. But I also don’t want to come off the wrong way either. So let me know down below if you would like to read something like that. Now you don’t have to start a side hustle because maybe you don’t have enough time for it and you actually like what you do for work, but you should always try to get paid what you’re worth. Set goals for your job and then achieve them so you can ask for raises or try changing jobs if you can find a better fit that will also pay you more to help you build wealth.
3. Forgetting about Irregular Expenses
Let’s move on to the third budgeting mistake that I really wish I had fixed sooner. But luckily, this one is a quick fix that we just have to plan for. and that error is forgetting about irregular expenses. Now when I say “irregular expenses,” that can mean just about anything. I’m talking about things like Christmas or birthday presents, prepaid car insurance, medical expenses, or really any expense that you wouldn’t expect to pay for in a typical month. Not budgeting for these things is a mistake that I was actually making just recently as I began to transition into being self-employed.
The issue for me was specifically medical expenses because the disadvantage of working on your own is having to pay for more expensive health insurance that is not provided by an employer. But I knew that going into this, so I budgeted for the monthly health insurance premiums that I signed up for, which ended up being about $270 per month. And health insurance is just a cost that I couldn’t avoid. But honestly, I really didn’t plan to use it much because, over the past few years, I’ve rarely had to go see a doctor for anything other than a checkup.
But of course, not everything goes according to plan, and over the past few months, I somehow ended up with one random medical expense after another for totally minor things. However, they have all occurred around the same time since the beginning of 2022. So even though I was prepared in my budget for the health insurance premiums, I did not really budget for any of the other out-of-pocket medical expenses, and I just planned to tag them under the miscellaneous expenses category in my budget if they ever came up.
Now, my rule of thumb with budgeting is that for my miscellaneous expense category, if I consistently have the same expenses showing up in this category for maybe four to six months in a row, then I think it’s time to add it as an extra line item. So that’s exactly what I did with medical expenses. I think it’s just always better to be safe when estimating what you think. Your expenses are going to be high because I’d rather plan too high for my budget and then spend less than the other way around. Now there’s no way to know exactly what my random medical expenses are going to be in a given month, so I just budget a couple of hundred dollars, and then some months I hit it, but then others I don’t.
But you might be thinking about some other common irregular expenses for your own budget, like gifts or maybe even vacation expenses or something else like that. For those, I would just create a separate line item for the month that you expect to pay for those expenses. So maybe you can have a holiday expense item when you’re preparing for your December budget and then have a vacation expense item in July for a summer trip.
And then in the months where you don’t have these irregular expenses, again try to get that savings gap as high as you can between your income and your expenses by cutting back on meaningful larger expenses and working to increase your income over time, and then take those extra savings and set it aside in a separate high yield savings account to help prepare for irregular expenses as well.
4. Not Having a Why
But next, let’s move on to budgeting mistake number four, which I think might be the most important mistake for anyone to fix immediately because it really held me back and even made me quit budgeting a few times when I was just getting started. That is not having a why. So when I began tracking all of my income and all of my spending, I really was just doing it because I was told that I should do that. But I never asked myself why I was doing it or what goal I was trying to achieve by budgeting.
What that ultimately led to was just inconsistency. So I would normally aim to set up a budget at the beginning of a month with what I expected to spend, and then once per week or every other week on a Sunday, I would update that budget with my actual expenses and income. But every few months, I would just slack off and either forget to do that or just push it off until later, until eventually I completely stopped budgeting for a while. Around that time, I was also feeling sort of stuck in my career and at my job because, all my life, I knew that I wanted to try to run my own business.
And that was just something that I was really passionate about. I truly believed that if I started a business on the side of my 9 to 5 job, eventually I would be able to take that side hustle full time. But doing something like that is obviously pretty risky. And I knew that I was going to need some sort of safety net of cash savings so that if the opportunity ever did present itself to me, I could make that jump and know that those savings could help pay for some of my living expenses as I grew the business.
So at that moment in late 2020 and early 2021, it all sort of clicked for me that if I could be consistent with my budget and cut costs as I tried to earn some extra income from my blog and YouTube channel on top of my normal salary, then maybe I could take that leap of faith one day and do it full time. And sure enough, at the end of 2021, the opportunity did show up, and I knew exactly how many months my cash savings could last me with my typical expenses. And that was one of the biggest reasons that I actually felt comfortable taking the risk of quitting my job to be self-employed and on my own for the first time.
Now, over half a year later, the goal has sort of shifted with my budget. So my goal today is to keep that cash safety net in place so I can continue to work for myself while also saving up for some larger purchases that I’m hoping to make. So the point here, and what I’ve learned, is to find your reason for budgeting and use that as motivation to keep it up. Maybe you want to pay off your debt, or maybe you want to be able to travel more or retire sooner, but whatever your reason is, just always keep it in mind and even write it at the top of your budget because I guarantee that doing that will make you want to stick with it even more.
5. Not Spending Money Intentionally
Then finally, here for mistake number five, this kind of goes right along with one of the main purposes of budgeting: becoming aware of your spending habits. And that mistake is not spending money intentionally. So I like to use the word “intention” a lot here on this blog. I talk about spending money intentionally and making decisions on what credit cards to use with intention. And the reason why is that I think too many people are just going through life on autopilot, especially when it comes to their finances.
They make the same purchases over and over again, or they fall into the same bad money habits. And what I’ve found is that a lot of the time, it simply comes down to a lack of awareness of these things or a lack of purpose behind their spending. And that’s why I love budgeting: it’s meant to help you open your eyes to not only how much you’re spending, but what you’re actually spending your money on. Trust me, it’ll surprise you if you’ve never budgeted before, and then all of a sudden you start tracking everything for a month.
You’re probably more likely than you would think to either be breaking even or losing money since apparently more than half of Americans are living paycheck to paycheck. I know that for me, this was the mistake that actually hurt me a lot when I got into budgeting because I was guilty of spending without intention. And then, after I started tracking these things, it actually felt very discouraging for me to see just how little money I was truly keeping each month. But I pushed through it and started correcting some of the mistakes that we’ve discussed in this blog.
Then, gradually, things began to get a little easier. It really was just a series of small improvements that sort of compounded to the point where today I’m actually very happy with where my budget stands for both my income and my expenses. So I think more people just need to be aware of where their money is going because then they can start to identify what purchases really do bring positive value into their lives and what purchases only bring short-term, small bursts of happiness that just don’t last.
And all I want to do by talking about habits like budgeting and using credit cards responsibly here on this blog is try to help anyone reading this get through their own money struggles that are going to be different for each of us. So if you really want to start budgeting for yourself, then go check out this blog over here next that has a complete walkthrough.