How to Fix 7 Common Budgeting Mistakes

Don't fall victim to these easy-to-fix traps.

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Here is a simple fact about budgeting. Just because you have a budget doesn’t mean you manage your money well. If you don’t believe this, consider the U.S. government. It has a budget—enough said.

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Budgets can be a great tool to help you achieve your financial goals. But if you approach budgeting the wrong way, it can lead to frustration, stress, and even more spending. So to help you stay on track, we’ve identified seven costly mistakes people make when trying to manage their monthly budget, along with a few suggestions on ways to avoid these mistakes.

1. Picking the wrong tools: As an initial matter, it’s important to start with the right budgeting tools. There are no one-size-fits-all solutions. For some, the best tools may be a pad of paper and a pencil. For others it could be a spreadsheet or personal finance software. And there are even online alternatives such as Mint.com. The key is to find what works best for you and stick with it.

2. Trying to track everything: There is absolutely no need to track every dime you spend. For most of us, we over spend in just a few categories. So pick the areas that cause you the most trouble, and track just those categories. It will make budgeting a lot easier and less time-consuming. The key is to ask this question—how will tracking my spending in this area help me better manage my money? If you can’t answer that question for a certain category of expense, there is probably no need to track it.

3. Setting unreasonable goals: Similar to dieting, we can kill a budget if we set unreasonable goals. We need to allow room in our budget for fun and for unforeseen expenses. If part of your budget is paying down debt, make sure you are realistic about how much you can pay on the debt each month. If we set unreasonable goals, we are much more likely to give up when we don’t reach them.

4. Failing to plan for periodic expenses: Annual or semi-annual bills can wreck a budget. Whether it’s life or car insurance, taxes, or gifts, it’s best to plan for these expenses on a monthly basis. One easy way to do this is add up the annual cost of these periodic expenses, divide be 12, and save that amount each month. When the bill comes in, you’ll have the money saved in advance to pay for it.

5. Failing to plan for emergencies: An unexpected expense can bring down a budget quickly. Whether it’s a car or home repair, or perhaps a medical expense, emergencies can throw us deep into debt if we are not prepared. While we can’t prepare for every financial situation, building up an emergency fund can help us handle many unexpected expenses. On a monthly basis, set aside money in a high interest savings account, to build your emergency fund.

[Visit the U.S. News Personal Finance site for more insight and money management tips.]

6. Failing to Automate: Automating your finances can go a long way to helping you plan and budget. Whether it’s paying bills automatically from your checking account or automating your retirement investments, automation makes life easier. As part of automating, consider paying recurring monthly bills and expenses with a credit card. By using a card, tracking these expenses is automatic. And if you use one of several of the best cash back credit cards, you get the added benefit of pocketing some extra cash each month. The key, of course, is to make sure you pay off the credit card bill in full each month.

7. Giving up: This last mistake is the most costly. If you are trying to budget and manage your money, you will make mistakes. You’ll buy something you later regret buying. Or you’ll forget about a periodic expense until the bill comes in. Mistakes happen. The key is to persevere. And to do that, it’s helpful if you recognize up front that you will have set backs. By expecting them from the start, you’ll be more prepared to deal with them when they arise.

DR is the founder of the popular personal finance blog, the Dough Roller and credit card review site, Credit Card Offers IQ.