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Budgeting won't solve all your problems. That's always been true—and it's particularly true in 2021. Nearly 11 million Americans are unemployed, as reported last week by the Department of Labor, and out of 1,038 American adults, half of them experienced other financial setbacks, including seeing a decrease in income, taking on more debt, or drawing on emergency funds, per a November 2020 Credit Karma survey.
But budgeting is still a worthwhile endeavor. Defining your money goals and creating a system for tracking how you're doing against them can help set you up for long-term financial success and give you a sense of control over your money.
Not all budgets are created equal, though; for one to be effective, it needs to be well designed. We asked several financial advisors the key mistakes that they see clients make—and how to avoid them.
12 common budgeting mistakes:
From Keller Lindler, financial advisor at Northwestern Mutual:
1. You're keeping your head in the sand.
While budgeting your finances can be stressful, you've got to begin somewhere. When you have no idea what's going on with your bank account, things can get crazy—fast. That's why Lindler suggests starting with a general goal to build savings. To do that, you've first got to know what you're making and what you're spending. She suggests using the 50/30/20 method as a general guideline to follow: 50% to essentials, like rent; 30% to wants, like eating out or fun purchases; and 20% to saving accounts, like an emergency fund or a medium-term goal like buying a car or house. "It's often more challenging to maintain a restrictive budget, and this method allows freedom to help pay for bills and to save and take those trips you have been waiting for," she says. She suggests tracking your spending for about three months to have a sense of your ballpark needs across each category.
2. You're leaving out non-routine spending.
A budget that doesn't include wiggle room for housewarming gifts or random pet toys is a budget that's set to bust. "Knowing how much to set aside for annual splurges like holidays, gift-giving, shopping, or other seasonal planning takes a bit of backtracking. Start by looking at your monthly statements from last year, then identify those moments of non-routine spending, total them up, and divide by twelve," says Lindler.
3. You're saving your credit card info online.
First, Lindler suggests rebalancing your budget on the last day of your work week so you know whether or not you have funds to spend over the weekend. To make it harder to go overboard, she also suggests disconnecting your credit cards from online shopping accounts and erasing your phone or computer's autofill credit card information. "Intentionally creating more steps between you and a potential impulse purchase gives you more time to ask yourself if you truly need that item," she says.
From Misty Lynch, a certified financial planner™ and a financial advisor at Beck Bode:
4. You're not planning for the future.
"When I see a budget that a client has put together on their own, it is usually a spreadsheet that lists out their fixed expenses and some variable expenses that they have gotten used to spending each month," says Lynch. "While that's fine, it usually doesn't leave any room for things they may want to do in the future. We should have money that is not an emergency fund—more like a buffer that someone can have and use that isn't going to take away from anywhere else." When that's not the case, notes Lynch, people can start to resent their budget and stop following it.
5. You're not evaluating your spending.
"Our brain loves shortcuts, and when we create a budget, we may just make room for the things we normally do because we always do them," says Lynch. Maybe you order takeout for lunch each day, or maybe your porch is always cluttered with Amazon purchases of random tchotchkes. "There is nothing wrong with those habits...The great thing about a budget is it brings awareness to how we spend. Usually my clients will tell me the things that matter most to them are their friends, family, health, or adventures, but their bank account tells a different story. When we start shifting money and energy towards the things that they care the most about, it can make it easier to adjust the habits or cut back on some of the mindless spendings that they don't feel good about in the first place."
From Misty Weltzien, CFP, ChFC, CLU, managing partner with Pacific Advisors:
6. You're not tying your overall goals to your budget.
"One of the biggest challenges with budgeting is that when the initial excitement of it wears off, it can be hard to stick to your budget," says Weltzien, who suggests creating separate savings accounts for different savings goals and renaming them to keep your goals front of mind. "For example, rather than having your child's 529 account be listed as ABC100002, call it 'Jackson's Debt-Free College Education.' When you see the goal associated with the account rather than the digits the institution assigns to it, you are more likely to contribute to the account." If one of your goals is to take a big annual vacation, for instance, creating a new account and naming it "Trip to Egypt, 2022" should help you be more motivated to change your behavior. "It's easier to stick to your budget when you put your 'why' behind it," says Weltzien.
7. You're not pursuing all available options to help with student loans.
Student loan debt can be debilitating; a 2014 Gallup poll found that graduates with more than $25,000 of debt have a lower likelihood of thriving across categories like social fulfillment, physical health, and purpose in life. Weltzien counsels her clients to refinance their student loans if they haven't already. "With interest rates at historic lows, it may be possible to lower your interest rate, gain better repayment terms, and consolidate your monthly payment," she says. She also suggests considering looking for an employer that offers student loan repayment assistance as a benefit.
From Andrea Woroch, budgeting expert and blogger:
8. You're depriving yourself of discretionary purchases.
"Reducing discretionary and impulse purchases is key to improving your financial health. However, cutting out all the fun stuff can backfire and cause you to give up on budgeting," says Woroch, who suggests adding a line item for fun back into your budget.
9. You're ignoring the "what-ifs."
"Many couples split household expenses but fail to discuss how those costs would be managed if someone lost their job or passed unexpectedly," says Woroch. "No one wants to have those tough talks, but having a plan is crucial for staying out of debt." Talking about contingency plans might lead you or your partner to buy a life insurance or disability policy or expand your emergency savings, giving you more peace of mind.
From Hiram Miguel Arnaud, a financial analyst and holistic wealth advisor at Strategies For Wealth:
10. You're not understanding what could be impacting your relationship with money.
"Take time to better understand your relationship with money," says Arnaud. "What was your parents' relationship with money? How have you been affected by it? I've seen people eliminate debt only to get into more debt because they don't have a healthy relationship with money."
From Lauren Anastasio, CFP at personal finance company SoFi:
11. You're making your budget too complex.
"I often find clients struggle with staying on top of their budget because what they've created is too time consuming," says Anastasio. "You may have created a few dozen categories for what you're spending money on and are trying to break each one down to the dollar in amounts that rarely are consistent from one month to the next." Instead, stick to the most basic of categories—like the "essentials," "wants," and "savings" categories mentioned above—or go with just a handful more if you want more nuanced tracking. If even the 50/30/20 seems stressful, Anastasio suggests an 80/20 approach: "Save 20% of what you make, and the rest is available to spend each month. If you don't spend more than 80% of your monthly income, you've stuck to your budget!"
12. You're trying to do everything manually.
Maybe writing down each transaction in a notebook or filling in an Excel spreadsheet by hand works for you, but if not, leverage technology. "Using tools to take some of the legwork out of budgeting will help you avoid feeling like it's too time consuming—and the tendency to give up on your budget and hope for the best," says Anastasio.