5 Budgeting Blunders That Hurt Your Finances

This article by Geoff Williams was published in the US News and World Report - Money over a year ago, but the advice is timeless. 

"If you're planning to create a budget, avoid these classic mistakes.

Everyone knows that a budget is the linchpin holding together your financial empire, or if you prefer, financial shack. If you don't have a budget, whether or not you know it yet, you have money problems.

But to avoid money woes, it isn't enough to create a budget. You have to design one that works properly. That’s why you'd do well to steer clear of these five mistakes consumers often make when budgeting.

Creating the budget – then not tracking the budget. It's easy to say you're going to spend a certain amount on your mortgage, your cable bill and other fixed expenses. But as everyone knows, variable expenses like groceries and gas can really throw things off.

"I find many people don't track where they spend cash," says Jerry Love, who has a certified public accounting firm in Abilene, Texas.

Tracking your cash isn’t always easy to do, a sympathetic Love admits. "With so many supercenters like Walmart, I see some people get a distorted view of what they are spending on groceries because when they go to the supercenter, they're purchasing a variety of items beyond groceries," he says.

There are plenty of apps and software programs that will help you track your spending. They include LevelMoney.com, YouNeedaBudget.com, Spendeeapp.com and Goodbudget.com.

Only budgeting monthly. While most of your bills and expenses occur on a monthly schedule, there are some that might not fall neatly into that cycle. Leonard Wright, a San Diego-based member of the National CPA Financial Literacy Commission, points out that most people have quarterly, semiannual or annual expenses.

"That property tax bill, car insurance, homeowners insurance, school shopping for the kids, the once every one or two year trips," Wright says. To account for all of that, "create a reserve line every month in your budget to set aside that expense on a monthly basis,” he says.

Not setting a realistic budget. If you're cash poor, it can seem irresponsible to budget for entertainment. So you don't. You plan for your mortgage or rent, your food, your utilities, gas and other essentials, and that's it. You will not budge from your budget.

Except, of course, you will budge.

Eliminating such expenses is a common mistake, according to Mauricio Rodriguez, professor and chair of finance at the Neeley School of Business at Texas Christian University in Fort Worth, Texas. "Making the budget so tight that it will be difficult to stick by it … It's important to set realistic goals," he says.

So even if you don't plan on eating out or catching a movie, budget for the possibility. The worst that happens is you have money left over at the end of the month. If you don't budget for some extras, you'll probably end up doing something extra anyway, and that's where the trouble comes in, Rodriguez says.

Trouble also occurs when you’re not honest with yourself about how much you make – or don't make. "This should go without saying, but I have seen some people who develop their budget based on their gross and not their net," Love says. "Working from gross is OK if you accurately reflect your tax liability," he adds. "I generally encourage people to budget based on their take-home pay."

Not planning for emergencies. Even if you account for everything going on in your life, you need to plan for what hasn't happened. Someday, you will need a plumber. Or your home will be infested with termites. Or your car will need new brakes. Emergencies crop up, especially when you're living an active life.

"Forgetting to budget for nonrecurring, involuntary expenses such as car repairs and medical costs [is a serious error]," Rodriguez says. "Such expenses will occur and can cause trouble if not accounted for."

If you're already living paycheck to paycheck, it may be impossible to put money aside every month for the possible flat tire or sudden operation. In fact, that may be what you use your credit card for. But if you have the money to put cash aside for life's bumps and bruises, that's an instant upgrade to your budget.

Not considering the true cost of a financial decision. Maybe you bought a house and knew you could handle the mortgage payments, but you didn't think about maintenance costs or the furniture you needed to purchase.

Of course, a house is an obvious example, but anything can harm your budget if you don't consider the true cost, Wright says. "People sometimes buy the car of their dreams only to find out every repair costs two to three times as much," Wright says, adding: "I've been guilty of this."

For instance, Wright says he got a great deal on a used Lexus but didn't think about the catalytic converter, a device California residents are required to purchase that helps cut down on pollution. It can be an expensive piece of equipment, depending on your car's make and what your mechanic charges to install it. For the used Lexus, the catalytic converter set him back $3,200 – $2,000 more than what he paid on his previous vehicle. "I was floored," Wright says.

There are plenty of one-off purchases, like books and furniture, where you'll pay money once and never again, but a lot of items require maintenance or ongoing costs. Think printer ink, pet food, a smartphone.

The bottom line: If you live your life without consulting your budget, you really don't have a budget. You only have money problems, whether you know it yet or not."