7 Budgeting Mistakes to Avoid

Quick Answer

The biggest budgeting mistakes to avoid are estimating costs, forgetting to account for all your expenses, being overly restrictive and leaving savings out of your budget. Fortunately, they’re all avoidable.

A couple look at a computer together while one of them writes on a document.

Creating an effective budget you can stick to is key to managing your money efficiently so you can afford expenses, build your savings and avoid debt.

But even though a budget is, at its core, just a plan for how you'll spend your money, the word "budget" can bring up associations of depriving yourself or stressing over money. Another common barrier to successful budgeting is designing a strict budget with ambitious goals—only to burn out within a month.

These budgeting pitfalls can derail your progress and add to your financial anxiety. Read on for seven common budgeting mistakes and how to avoid them.

1. Guessing at Costs

When you're starting a budget from scratch, coming up with accurate figures for your monthly expenses can be a chore. You may know how much to budget for fixed costs such as rent, but planning for variable expenses like groceries and clothes might tempt you just to ballpark it.

Unfortunately, estimating costs can derail your budget before it even gets off the ground. Instead of guessing, review your bank and credit card statements for your transaction history, ideally over a few months. Then, tally up your spending in various categories and plan your budget around your actual monthly spending habits.

2. Leaving Out Expenses

Like guessing your costs, if you don't account for all your expenses when you set up your budget, you can end up short on cash. Make sure to dig through your transaction history to create a list of your irregular expenses or one-time expenses. These are costs that come up just once a year, like car registration, or that vary month to month, like gifts.

While you know they're coming, finding the money to pay for irregular expenses can be tricky. If you haven't set cash aside for them, you could end up going over budget or relying on debt.

Instead, try preparing for irregular costs by setting up a sinking fund dedicated to these expenses and directing money toward it throughout the year. You can build this as a separate savings goal in your budget.

Here are some examples of irregular expenses you could consider saving for in advance:

  • Insurance payments
  • Home repairs
  • Broken tech replacements
  • Annual subscriptions (such as for web hosting or Amazon Prime)
  • School tuition and fees
  • Holiday shopping
  • Membership dues

3. Not Tracking Spending

Half of the budgeting process is setting spending targets based on your income, prior expenses and goals. The other half is tracking your spending and then adjusting as needed.

You can use your bank and credit card statements to see your transactions. You can track spending manually in a spreadsheet or use a budgeting app that tracks and categorizes your spending for you. The method doesn't matter; what does matter is that you're consistent with tracking spending.

4. Leaving Savings Out

Build savings directly into your budget to ensure you continue to progress toward your goals each month. Then, automate your savings transfers each payday to move your money immediately from your checking account.

Make sure you tailor your savings target to your income and expenses to avoid feeling overburdened. One budgeting strategy that accounts for savings is the 50/30/20 budget plan, which directs 50% of your income toward expenses, 30% toward spending and 20% toward savings. You can experiment with these ratios to ensure you're saving at a pace that balances enjoying the present with building a solid financial future. Whether you choose a 50/30/20 budget or another budgeting strategy, account for savings is critical.

5. Being Overly Restrictive

Dialing back your discretionary spending can be necessary if you're experiencing a financial emergency, living beyond your means or grappling with debt. But as a long-term spending plan, sticking to a budget that's too strict usually isn't sustainable. In fact, it can have the opposite effect and drive you to overspend. Instead, set realistic spending limits, aiming to strike a balance between living within your means and treating yourself from time to time.

6. Planning Around Gross Pay

Use your net pay, also called take-home pay, when determining how much money you have in your budget. If you use your gross pay (what you make before taxes), you'll assign more cash in your budget than you have.

If you have a regular income, you can check previous direct deposits or look at your pay stubs to calculate your expected monthly income. Budgeting with irregular income can be a bit trickier. To approximate your expected income, multiply your hourly rate by how much you expect to work in a given period. Try to build a buffer into your budget in case you're off.

7. Not Working as a Team

Budgeting with a partner offers ample opportunity to grow and strengthen your finances as individuals and as a team. But budgeting as a couple can also be tricky. Lapses in communication can lead to overspending and even overdraft fees if, for example, a large bill hits your account balance the same day one of you makes a large purchase.

The antidote to the challenge of budgeting as a team is simple: Communicate often. Set up systems for how you'll collaborate on your budget. You might use a budgeting app for couples and set up weekly or biweekly payday routines where you meet to discuss your budget for the next pay period.

Stay Flexible

To protect your financial health and prevent a breakdown in your budget, avoid the budgeting mistakes above. If your spending does get off track, don't panic. You can reel it back in and find ways to cut costs.

Always prioritize affording your expenses and making debt payments to avoid damage to your credit. And aim to add flexibility and stability to your finances, funneling extra cash into short-term savings for unexpected costs and into an emergency fund for true crises.