It’s the new year and many people look for a fresh start for their physical, emotional, mental and financial health. If you are looking to focus on your finances, creating a budget (or updating one) is a key part of meeting your financial goals.
Take a look at these common spending mistakes people make and how you can avoid them to make 2022 your strongest financial year yet.
5 most common spending mistakes that derail your budget
- Relying on Credit.
Making all of your purchases on a credit card may seem like a good way to track all of your spending, as well as add an extra layer of protection, but it can also lead to spending more than you really have. For example, if you have a general idea of what you have to spend and your purchases put you right around that amount but then you see a good deal online or decide to pay for something in full because you “know” you’ll have the money next week or month, you can get into debt quickly.
- Free offers that turn into large one-time or monthly recurring charges.
Free trials or introductory offers are a great way to try something at no cost or a low cost before making a big investment. Sometimes that’s a TV or music streaming service, food delivery plan or even an online budgeting software. However, many services and companies that offer free trials make their money one of two ways: (1) you liking the product or service and paying for another service or product or (2) you forgetting to cancel your trial and automatically getting rolled into the paid version of the product or service you were trialing. Sometimes this means a one-time payment for the service and other times it means a recurring monthly expense. In the instance of a recurring monthly expense, oftentimes you can cancel the subscription to stop future expenses (though be aware that there may be cancellation fees).
- Forgetting to set aside funds for fun.
It can be easy to be all work and no play, and that applies to the way you spend your money, too. If you don’t have a section in your budget for entertainment, be sure to add a little fun into your 2022 budget. Whether your idea of fun is a weekly trip to the record store for another vinyl, spoiling your friends and family at baby or bridal showers, attending a sporting event, etc. be sure to plan for that spending in your budget so it doesn’t become a source of overspending.
- Having bigger eyes than your account can support.
Just like with food, you may be biting off more than you can chew (or more than your account can support) with the financial decisions you are making. This can happen a few ways: you see others spending money or your friends ask you to go out and you don’t want to miss out, you find your dream car or home and decide to stretch your budget to pay for it or acting on impulse (to name a few reasons).
- Living budget-less.
Budgets. They take time to set up and even more time and commitment to make them work. It can be easy to live without a budget…spending money as you see fit and making guesses on how much money you’ve spent and have left to pay your bills. However, living without a budget can be one of the most common spending mistakes that people make. Creating a budget helps you understand where your money is going, as well as helps you identify goals and stay on track as you progress toward them.
Tips to avoid common financial mistakes to help you keep your budget on track
- Take inventory of your spending habits. The first thing you can do to avoid some common financial mistakes is to create a budget. Start by reviewing your monthly expenses and income for two or three months to create an accurate estimate of your expenses. Once you outline your expenses and income, you can start identifying any changes you want to make. This could be cutting some duplicate expenses, putting more money aside in your savings account, etc.
- Aim to reduce recurring costs. One way to cut your overall expenses is to look at some of your recurring expenses, such as cable/TV subscriptions, internet, cell phone, subscription boxes, etc. First, work to eliminate duplicate expenses (such as more than one meal subscription, TV streaming or music subscription service). Next, take a look at how often you are using some of your other recurring expenses, such as a gym membership or monthly fees for various apps on your devices.
- Try to avoid impulse buying decisions. From adding a thirst-quenching drink to your cart while standing in the checkout line to clicking on an ad in your social media feed, impulse purchases can quickly take your budget off course. A good rule of thumb is to leave the item in your online shopping cart overnight to see if it is something you really do need or want after you’ve had more time to think about it (while you may miss out on one deal the retailer is offering, odds are high there will be another deal soon).
- Focus on and build upon your positive money habits. It can be easy to be hard on yourself and get down about the money mistakes you’ve made. That’s why it is so important to also focus on the good. Evaluate what financial decisions went well over the past year and try to replicate those in your new budget. For example, if you were consistently setting aside money in your savings last year, aim to keep the savings going this year, maybe even increasing the amount you save.
While investing energy into creating a budget isn’t the most glamorous way to spend your time, it is definitely worth it! Check out more tips for creating a budget or building your savings on the Verve blog.