So now that you have removed the psychological blocks preventing you from budgeting and using your money wisely (see “Budgeting: Before You Begin”), there are some points in the budgeting process that may be so frustrating, you will be tempted to give up altogether.

However, knowing these budget pitfalls in advance will help you plan through the process, even when you later find that some of your income and expense expectations may not fit as well as you had outlined in your spreadsheet. From there, you will have the resolve to make adjustments to your budget so that you are allowing enough income allocation for your regular expenses and improving the quality of your life by easing some of the stress.

First, budgeting authors adamantly claim that budgets are never correct or are not realistic. This occurs for a number of reasons. People under- or over-allocate for expenses, and then are dismayed during the first month they try to keep to their budget and overspend. This is not actual overspending, but attempting to save money by not allocating for realistic expenses. Having a surplus of funds after allocating for savings or discretionary expenses may result in overspending at the end of a budgeting schedule. All income should be allocated in some way to ensure it is being used wisely.

If you have a spouse or family, it may be wise to talk with them to assess realistic spending habits before devising a budget that hurts everyone’s standard of living. Remember, when a budget is sound, no one will really feel distressed over your allocations.

Another problem identified by budgeting authors is that many people plan a budget that acts as a glorified list of income and expenses---there is no relationship between how much is overspent or under-spent at the end of each budgeting period, and the projected income or expenses in the next period. It is suggested that performance should be reviewed at the end of the budgeting period in order to make adjustments to allocations for the following one. Considering that a budget is always imperfect, there is no reason not to make regular modification to improve it and make it more accurate. Also, by regularly reviewing and adjusting your budget, you can account and allocate for one-time annual expenses.

One final budgeting pitfall to avoid involves positive financial times---when you have surplus funds after income has been allocated for all of your expenses and savings. It is best to allocate these funds somewhere before the new month or budgeting period begins (even if it is allocated toward “fun” or “binge drinking”) then to have it lying around in a checking account. In this way, it reduces impulse buying and potential overspending. By allocating surplus funds, you are making the mental and practical effort to adhere to a budget, even while having fun with your earnings.

References


Mgichome.com. Develop a Budget
Financialplan.about.com. The Psychology of Spending Money
Gettingfinancesdone.com. 3 Reasons Most Budgets don’t Work