Hey, guys. It's Chelsea from
The Financial Diet. And this week, I want to
talk all about the mistakes that people make when budgeting. We stress a lot at
TFD how important it is to have a
budget no matter what you're earning even if you
can't save $1 every month, it's important to know
where all the dollars you do have are going. Remember that there is
no such thing as too poor to need a budget. Even if you are
taking in $10 a month, you should be tracking
and accounting for where each one of those $10 is going. But having a bad or overly
restrictive or counterintuitive budget can actually in many
ways do more harm than good. Because it makes you feel as
if well, I tried budgeting, and it didn't work, so might as
well go back into [BLEEP] mode. And having a budget that
actually does work for you and actually responds
to your needs and habits can make managing your money
feel liberating and something that you don't have
to overly think about rather than something that
is overly restrictive. The key to a good budget
is remembering that there can be room for anything. There just can't be
room for everything. So learning to prioritize
is incredibly important. And that's going to
be difficult to do if you're falling into any of
these nine common budgeting mistakes that we see a lot. Number one is underestimating
what you actually spend. When you're making a
budget for the first time, it's easy to sort of go
by that seems reasonable when deciding an amount
for a given category. And we also have a tendency
when making a budget to think, "Well, I should
be trying to minimize all my spending, right. So might as well
radically underestimate and try to stick to it." But a budget only works
if you are actually able to meet those spending
limits in each category. That means knowing yourself,
knowing the type of environment you live in, and knowing what
you actually tend to spend and maybe sometimes
overspend on. For example, I live
in New York City, so my theater budget
is going to be a lot more substantial
than someone who lives in rural Kansas. So in order to set
the amounts you need to cap each category
at, go back and actually analyze your spending. You can try to undercut yourself
as an incentive to get better, but don't make them
overly restrictive because you are
almost guaranteed to go over budget in a
certain category, which is one of the most common things
that leads people to just say screw it on the whole budget. Number two is not including
irregular spending. Now, once you've
actually done the work of tracking your
spending, that is what gives you a
good starting point for deciding how much to
allocate to a certain category. But a snapshot of
your spending habits doesn't actually adjust for
real life and a holistic view of how we spend money. For example, there
are certain things that tend to go way up or
way down on a given season. And there are also plenty
of recurring expenses that we have a tendency to
forget until they show up on our bill unaccounted for. These are things like card
fees or membership fees, basically the little stuff
that can feel easy to forget but will chip away
at the validity and the reliability
of the budget you're creating for yourself. There are also always times
of the year where you're going to be spending more. In summer, you're going to have
to allocate for an AC budget in many areas. At the holidays,
you're likely to have to budget a lot more for gifts
and travel and other holiday activities. To dive a little
bit more into this, I'll link you guys
in the description to a video we did about
things that you are probably not putting in your budget but
you should be accounting for. Number three is not auditing
your recurring expenses. According to a recent survey
from the consulting firm West Monroe, the average
person spends $273 a month on subscriptions everything
from meal kit deliveries to Amazon Prime to Netflix
and other streaming services. Now, we're not saying
that you have to get rid of all of these services. But it's likely that within
them there are at least a few that you're paying for that you
don't use enough to justify it or perhaps don't need to buy
because you could be sharing an account with someone
else or just generally can get rid of because honestly,
you don't need like seven different streaming services. Also on a side note on that
can we just have cable again? What is going on? How am I paying for like 15
different streaming services? And then every time
a new show comes out, it's like I don't have that one,
so now I have to get a new one. Like I'm supposed to
[BLEEP] buy Peacock now so that I can
watch Real Housewives Ultimate Girls trips? I'm sorry, like those ads about
you wouldn't steal a computer, I'm going to steal that show. I can't pay for another
streaming service. Anyway realistically,
you don't need to have access to
everything at every time, so picking and choosing
between the subscriptions and memberships that actually
make a difference in your life is crucial like my beloved
Hulu because I need my HBO. Number four is continuing the
same negative spending habits. One of the other benefits of
going through and analyzing your spending is
being able to see your habits and
patterns that might be easy to ignore day to day. When looking at
your spending, you may actually be surprised
at yourself and how much you tend to spend in a
given area like me and my extremely high
quality dairy products, which I'll never give up. It's worth it. And common
manifestations of this are going to be things
like emotional spending when you have certain
patterns you fall into or things you buy when
you're feeling really sad or like you want to
celebrate something, or impulse spending
when you buy something kind of in the
heat of the moment without really
thinking it through and it's the kind of
thing that you wouldn't have otherwise
bought if you gave it a moment's consideration. And bad habits like
impulse spending can be really dangerous to
maintaining a solid budget, but they don't mean you're
inherently bad with money. And in fact, spending can be
an extremely normal response to stress. For instance, between
March and May of 2020, American impulse
spending increased by 18% according to a survey from
crowdsource shopping platform Slickdeals. Yeah, we were all
hashtag going through it and buying those nap dresses
on the internet except me. They just don't look good on me. And there is a difference
between recognizing a bad habit and accepting a
bad habit, but you can allocate for a bad habit. For example, if you have
moments where you just want to be able to walk
into a Target and go nuts, set aside an amount of money
in your budget for that. And as I said in
last week's video, you can even buy
yourself a gift card for the type of spending
that you don't necessarily want to be creeping into
all of your other finances. Allocate for the
decisions that you're likely to make so that when
you occasionally make them because you are still human,
you know that you've already thought ahead, and it's not
going to wreck your otherwise healthy budget. Number five is doing
it all manually. That means as opposed to an app
and/or spreadsheet formulas. Now, some people do really like
to do all of their budgeting manually. That means with a pen and
paper or by manually doing the math in an Excel
sheet themselves. And while we won't forbid
you from doing this if you're exceptionally
good at math and just like noodling
around in Excel sheets in your spare time like
a psycho, just kidding I use Excel sheets all the
time for my personal use. I just don't do math in them. We're not going to prevent
you from doing that. But it's important to remember
that for 99% of the population, doing all of the
math manually when you start to get into longer
windows of time on a budget or you're looking at projections
or trying to figure out longer term financial
planning it is very, very easy to make mistakes with your
math and to not notice them. For TFD's budgeting,
actually back in like the Paleolithic era
when I was doing the budgeting myself, which like
God help this company, I used to feel like it was
more tangible and real, and I was doing a better
job if I was actually doing the math in an
Excel sheet myself. Surprise, surprise there were
tons of mathematical errors all throughout it, which
is really dangerous when you're working with
really important numbers. There are tons of great apps
out there that will help you or wonderful Excel sheet
template that you can use that will help you do the math. But it's important to remember
that the idea of doing something manually does not
always mean doing it better or taking better care of it. As we've discussed before, when
it comes to finances, often the best thing you can
do is really automate it and take the work out
of your own hands. Number six is planning
to save after you spend. It can be very common
when setting up a budget to treat savings as just
another category as you would any other area of spending. But the problem is that if
you treat savings as something to happen when all of the
other spending is done, you will often find that you
spend into your allocated savings and don't have enough or
possibly anything when it comes time to make that transfer. In 2018, the Federal Reserve
reported that 39% of Americans have $400 or less in
savings, which can't possibly constitute an emergency fund
for the average American i.e. enough money to cover three
to six months of expenses in case of emergency. At TFD we always
advocate the pay yourself first method, which
means having your savings and other things like
investments debt repayments et cetera immediately
removed from your account and allocated for as soon as
your paycheck or a deposit hits. That way you are not
tempted to spend it. And I will say it's worth
reiterating that your emergency fund should almost always
be at a separate bank than your checking account so
that the two accounts are not connected and you
won't be tempted to draw a little bit from
your savings account next time you're checking account
is looking too low. Number seven is
not automatically divvying up paychecks. Now obviously, if you are not
getting a regular paycheck at a regular schedule that can
be automatically accounted for, and you are doing more
irregular deposits or receiving irregular
payments, this is going to be a little bit
more difficult to set up. But that doesn't
mean you can't do it. Basically, you need
to get to a place where when money
hits your account it is automatically
diverted to other areas where you need to go, savings,
investments, debt repayments, sinking funds, et cetera. And with a reported 92%
of Americans getting paid through direct deposits,
there's really no excuse for not doing it. For example, if you're on
payroll at a given employer you can likely have
them send money to different accounts
from the source. This way, you are saving money
literally before you even have the option not to. Additionally, if your employer
offers a 401k or 403b program, make sure that you're enrolled
and that your contributions are automatically withdrawn
from each paycheck so that you don't even have
the option to spend that money. And if you don't have a 401k
or other employer sponsored retirement account, you can
still set up recurring deposits to an IRA. And again, even if you are
not getting regular deposits, there are plenty of
tools to make sure that when you do deposit money
that money is being diverted where it needs to go before
you have a chance to spend it. Our creative director, Holly
used to use the banking app Capital when she freelanced
which would automatically withdraw certain amounts into
different savings buckets each time a check was
deposited into her account. The point is not
just making sure that that savings is happening. The point is that
the less you can even see it in your checking
account, the less you will feel like you're being
deprived of something. You don't want to mentally
take that money into account before you see it go because
then you'll feel sad. Number eight is not
adding an income stream. When it comes to most
personal finance advice, if you're in a place where
you're struggling financially, it can feel like all of
this is out of reach and not worth doing. Because let's be
honest, you have to already be spending
money on lattes in order to cut back spending
money on lattes. And you can only cut
back your spending so much before you
hit a wall and realize that the only alternative is
adding a stream of income. Even if you're able to
cover your monthly expenses with your paycheck, if you're
not able to save that means you are not earning enough. Adding an income stream
or even increasing your main source of revenue
is incredibly important. And studies show
that if you have been at your primary
employer for several years, especially if you started
at that job fairly young, you are likely being underpaid
based on competitive market rates. That means it's time to go
in and negotiate a raise or like many people have to
do to realize the largest increases in their salary,
go to a different employer. The goal is to get to a
place where you are not having to constantly choose
between meeting your savings or debt repayment goals
and actually living the life that is right for you. In the short term,
this can mean things like getting a side hustle or
picking up seasonal part time jobs and of course negotiating
with your current employer or looking for other comparable
jobs that will pay you more. But long term, having other
streams of income, especially eventually passive
income, like that which we can see from investments
is key to making sure that one job, which
let's be honest, you may eventually
get laid off from or the company itself
might fold isn't the totality of your income. Diversifying your
income streams means having more and more control
over your financial freedom and decision making. We'll link you in the
description to a video both on finding easy and
adaptable side hustles as well as negotiating
for your primary income. Lastly, number nine is
spending your emergency fund on things that are
not emergencies. One of the most basic
tenets of budgeting is you do not ever touch
your emergency fund unless it is for an actual emergency. If you are having to dip
into your emergency fund in order to pay
bills, that means you are not earning enough
or you are spending too much. Because in addition to
being there to cover costs should the worst
happen, emergency funds are crucial for ensuring
that you will remain out of credit card debt. Because even if you're generally
pretty good with credit card usage, meaning you pay it off in
full at the end of every month and accrue no interest. If you come up
against an emergency and don't have the
cash for it you will be forced to put it
on a credit card, which almost ensures that you will
start a cycle of credit card debt. But an emergency is things
like unexpected car repairs or being unexpectedly
laid off from a job or being injured and
having a high deductible. It is not a Harry
Styles concert. Although some of his outfits
lately are emergencies, I'll be honest. There should always be a
buffer in your checking account for oops spending that are
small little annoyances but not really emergencies or
when you occasionally go above and beyond any one
given spending category. But emergency funds are for
emergencies nothing else. And if you're still working
on saving your emergency fund, we'll link you in the
description to our video all about how to save one
in a short amount of time. But no matter where you are
on your budgeting journey, congratulations on first
and foremost taking a serious interest in your
financial health and future. And as always, guys,
thank you for watching. And don't forget to hit
the Subscribe button and to come back every
Monday, Tuesday and Thursday for new and awesome videos. Goodbye.
