Making a budget can streamline your expenses and keep you out of debt, but if you don’t do it right, the whole exercise may be fruitless.
“Budgeting mistakes usually happen due to lack of awareness about financial planning, not understanding where money is going to come from, not tracking expenses, not living within your means, and so on,” said AK Narayan, CEO, AK Narayan Associates, a financial planning firm.
Here are five top mistakes to avoid when making a budget:
Not Knowing Where Your Money Is Going
Most of us work through the month for a single pay cheque. When you have a budget, you know where your money is being spent. “This helps you to track your expenses, control inflow and outflow of income. For this, you need to identify all the sources of income. You must take into account the current income and future expenses. And overall, you must aim to ensure saving first and spending the balance,” says Narayan.
Failing To Differentiate Between Needs And Wants
It’s very important to understand the difference between ‘needs’ and ‘wants’ to avoid excessive spending. For this, you must categorise your spending needs into clothing, food and rental. You must understand your pattern of spending. Essential expenses need to be budgeted and paid for.
Wants, on the other hand, include impulsive purchases, buying things not required, buying on credit, or going beyond your budget. This would help you live within your means.
Taking Too Much Debt
High-cost debt, especially credit card or personal loan, can be detrimental to your finances. Not being able to pay this debt will further push you into a debt trap. Hence, you must buy only what you can afford. “Make sure your loan is less than the limit set. Never go beyond 30 per cent net take-home pay to service EMIs. Shop carefully and you must do adequate research before availing a loan,” adds Narayan.
Not Controlling Your Spending
To be financially in a good position, you must reign in excessive spending. Try not to get tempted when companies offer credit. A high-end gadget bought on EMI or any impulse shopping is an example. Spending money beyond your means or spending money on credit could be a recipe for disaster. If you create a budget and stick to it, you can avoid this. Try to pay debt on time. Do not borrow to invest, rather use savings to invest.
Not Preparing For An Emergency
Not preparing for an emergency can spell disaster and upset your budget. As we all know, the only way to have surplus money is to save it when you earn. This would come to your aid during rainy days or when you lose a job, for medical emergencies and, going ahead, for retirement. As emergencies come without any prior warning, you must create a surplus emergency fund of at least six months of your expenses. If you use it up, you must pro-actively build another one. This would help you feel more confident and more in charge of your life.
Budgeting can lead to a more comfortable and peaceful life. You won’t struggle to meet your expenses and not dip into savings.
