A budget can make or break you. Only 49% of Canadians have a budget to track their day-to-day finances. Yet Canadians who have budgets are less likely to fall back on their financial commitments and less likely to be short of money.
You should give budgeting a try. But you shouldn’t pull out a piece of paper and a pen just yet. You should learn about the most common budgeting mistakes and take steps to avoid them.
What should you do when you make a budget? How should you adjust your budget over time? How can you take steps to save money and decrease your expenses?
Answer these questions and you can create a better financial future for yourself. Here are eight budgeting mistakes you can avoid.
1. Not Creating a Budget at All
A bad budget is better than no budget. It lets you keep track of what your expenses are, and it gives you a ceiling for your expenses.
You don’t have to create an elaborate budget with graphs and diagrams. You can open up a Word document and type out how much money you want to spend on each of your expenses.
To start creating a budget, you should take a look at your financial holdings. Figure out how much money you have and how much you can afford to spend on everything.
You should then take a look at how much you spend and put your expenses in categories. The costs of rent and utilities can go under housing while groceries and takeout can go under food.
2. Forgetting About Taxes and Additional Expenses
Whenever you are calculating how much money you can spend, you need to incorporate taxes. Under federal law, you must pay 15% of the first $50,197 of your taxable income. You then must pay 20.5% on the next $50,195.
A few provinces have additional sales taxes. Five provinces use the harmonized sales tax (HST), which lumps together federal and provincial sales taxes into one payment. When you buy a product in a province with HST, you will pay 15% of the sales price in taxes.
The federal government charges a 5% national sales tax, and some provinces charge this tax alongside their own provincial tax. Manitoba and British Columbia charge a 7% tax. A few provinces do not have sales taxes and only charge the federal government’s tax.
Besides taxes, you may need to pay fees on the services you receive. You have to pay your credit card companies money in order to continue to use your cards. You also may make some annual or semi-annual purchases like paying for insurance.
Factor in all of these payments into your budget. To reduce the amount you pay in sales taxes, you should minimize how many new things you buy.
3. Picking the Wrong Duration
Most people assume that they need to make a monthly budget. Most companies send monthly bills to their customers, so it’s easy to run the figures for expenses month by month.
But you’re under no obligation to draft a monthly budget. Many people learning how to make a budget start with weekly budgets instead.
This keeps your numbers small, making calculations easier. A weekly budget also helps if you’re living paycheck to paycheck or don’t have a consistent income. You can start each week drafting your budget and you can make adjustments based on how much money you have.
As time goes on, you can change the duration. You can transition to bi-weekly budgets if you start earning more money. Feel free to try out different templates for writing a budget so you can see what different budgets look like.
4. Sticking to the Same Budget Month After Month
It is okay to adopt the same budget for a few months straight if you are making the same amount of money. However, you should change items in your budget based on a few factors.
You may acquire additional expenses like caring for children or paying for a new car. You must add these expenses to your budget and shift money away from other areas. You may need to spend less money on discretionary things in order to care for your child.
On the other hand, you may earn more money. With more money to spend, you can add more money to your discretionary payments or another category.
While you are writing your budgets, you should keep saving goals in mind. You may want to save enough money so you can move out or go on vacation. You will need to adjust your expenses over time so you can meet your goal.
Don’t make changes to your budget just for the sake of making changes. As long as you are paying for everything you need to pay for, you can keep your budget as it is. But be willing to make adjustments and track how your money ebbs and flows over time.
5. Forgetting About Emergencies
Your savings should be an item on your budget. You should take note of how much money is in your savings account and what you are saving for. In addition to meeting your savings goals, you should save for retirement and emergencies.
You must set money aside that you can use if you lose your job or go through a personal crisis. Try to have at least three months in your emergency fund.
You may have additional expenses after an emergency occurs. If your savings don’t cover those expenses, you need to shift money around so you can cover them. Use your previous budget to see where you can draw money from and add the new expenses to your next budget.
6. Failing to Cut Down on Expenses
You should always be looking for ways to save money. Reducing your expenses by $10 every month can make a big difference when you are paying for rent or groceries. Take a look at each category of your expenses and do your best to cut things down.
You can cut your food expenses down by using coupons and buying food in bulk. Frozen produce tends to be cheaper than fresh produce, so try buying frozen vegetables whenever possible.
You can keep your car if you have a long commute. But transitioning to public transportation can significantly reduce your transportation expenses.
If you can downsize to a smaller apartment, you should do so to save money on rent and utilities. However, a move can be disruptive, and you should not compromise your personal comfort. You can rent out your extra rooms to make some money back instead.
If you have a lot of debt, you may be able to reduce it by consolidating your debts together. You can take out a loan, use the money to pay your debts off, and then work to pay back the loan. Make sure you read the terms of the loan contract before you take money from your creditor.
7. Removing All of Your Discretionary Spending
Your discretionary spending is the money you spend on things you don’t need. The money you spend on internet access does not count because you may need the internet to contact your family or work. The money you spend on television, movies, and streaming services does count.
You should keep your discretionary spending as small as possible. But you should not eliminate it. You need entertainment to relax after a long day of work.
The key is to find cheaper ways to keep yourself entertained. You can rent movies from a library instead of buying them. You can ask friends to record television shows for you and send you the episodes on a DVD.
You can also find plenty of free ways to entertain yourself. You can write stories, go out for walks, and look at public sculptures.
You should know how to practice self-care on a budget. Developing a morning ritual for yourself can help you ease into the day and overcome stress. You may want to drink a glass of water or light a scented candle that can wake you up.
8. Avoiding Discussions With Other People
You’re not alone when you need to learn how to stick to a budget. As you start to make your own budgets, you should turn to financial professionals for budgeting advice. Ask them to run the numbers on your budget for you so you can determine if you are covering your expenses.
You can give your friends and family your budget and see what they think of it. If you live with a significant other, you should run your budget by them and ask for their approval.
Dodging the Most Common Budgeting Mistakes
The most common budgeting mistakes can make managing your money a nightmare. You should make a budget, but it should contain precise details. You should bear in mind your additional expenses and how your finances change over time.
You should take whatever steps you can to cut your expenses down. Little things like couponing and relying on public transportation can help. Make sure you have enough money to cover emergencies and get support from your loved ones about your budget.
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