7 Budgeting pitfalls that can push your finances off track

A budget is the most useful tool to help you manage your money wisely. But just creating one will not solve your problems; a budget should be followed with discipline. It takes time and effort to perfect a budget, and to ensure you achieve your goals sooner, avoid the following common budgeting blunders that may hinder your progress:

Watch Budget: Your means to achieve the dream lifestyle to know how budgeting can help you.

1. Budgeting on assumptions

Budgeting based on assumptions or an inaccurate assessment of your finances – such as overestimating your income or underestimating your expenses – will lead to you spending more than you earn.

Timeless advice: If you earn bonuses or incentives in addition to a monthly salary, you cannot just divide it by 12 and add to your monthly incomes. These should be added as additional funds of months in which these are earned and can be used to fulfil financial goals or repay debts sooner.

2. Creating a budget that’s too tight

Budgeting for every single rupee you earn can cause you to overshoot your budget when expenses fluctuate, or a sudden need arises. You may have to dig into your savings or borrow to take care of fluctuating expenses like high utility bills, unexpected visitors, rise in prices due to inflation, etc.

Timeless advice: Keep a buffer in your budget to cover small fluctuation in expenses. If you are still left with that extra amount at the end of the month, add it to your emergency fund to cover for expenses during unforeseen situations like a job loss or serious illness.

3. Not tracking and recording expenses

Your budget will remain an excel activity if you don’t track where your money is going. You need to collect receipts of your purchases. You also need to save transaction details of all online payments. Only then can you accurately know how much you are spending on each category of expenses so that you can avoid exceeding the set limit.

Timeless advice: Try a budgeting app for easier money management.

4. Spending before saving

If you don’t set a fixed amount in your budget as savings, you are robbing your future self. Your goals may remain as just wishes, or you may end up borrowing to achieve them, leading to debt-related stress.

Timeless advice: Keep a separate bank account for your savings and add a fixed amount at the beginning of each month in it for your short-, mid-, and long-term goals.

5. Not revising your budget regularly

If you don’t re-adjust your budget based on changes in your income and expenses, you will either end up spending more or saving less than you should. If you get a raise or move to a smaller apartment, it should reflect in your budget.

Timeless advice: Every time you achieve a goal, your budget should be re-adjusted to fund your next goal. Depending on the amount required to achieve that goal, you may have to cut down on some unnecessary expenses.

6. Ignoring the small spends

Spending Rs. 50 on coffee or Rs. 200 on a cab ride every other day may not seem like much but can add up to thousands of rupees in the long run. Make sure you budget for these spends.

Timeless advice: Be honest with yourself and include even the smallest expenses in your budget.

7. Spending impulsively

The primary aim of budgeting is to plan your expenses in advance, but if you keep spending impulsively, your budget will fail to keep your finances on track.

Timeless advice: Budget using the ‘Envelope Method’ – set aside a fixed amount for each expense category in labelled envelopes. Label one envelope as “Me money” and keep some amount in it to spend on anything you wish to.

Go here for tips to make a budget that works.

Now let’s look at how Seema and Uday fixed the pitfalls in their budgets:

Seema’s story

Seema Singh is smart, modern, and single. She has a well-paid job at an advertising company and was used to living lavishly until she had a road accident. She had no health insurance, so the cost of hospitalisation, medical tests, and medicines forced her to take a high-interest personal loan. This landed her in a debt trap as she already had a large amount of credit card dues and an auto loan. She was bed-ridden for three months, so once she exhausted her paid leaves, she received a reduced salary for the next two months. This made it harder for her to manage her expenses.

From following a loose budget, Seema switched to a budget using the ‘Envelope Method’. To be able to repay all the loans along with monthly expenses, Seema had to make some drastic cuts in her spending. She stopped going out for meals with her friends for the next year. During her recovery period at home, she collected all her unused clothes and accessories to sell them at her friend’s garage sale. She started an emergency fund with this extra money to which she added 10% of her income every month.

Seema set three goals – repaying her loans, building an emergency fund, and getting medical insurance.

Uday’s story

Uday Jha is a freelance press photographer with almost three years of experience. He started his career with a one-year contract with an international magazine that paid him well. Once that contract was over, he started working independently. Sometimes he received large assignments that easily took care of four-five months of his expenses. When he did not get such assignments, he had to resort to borrowing from friends and exhausting his credit cards.

A turning point in his life came when his aged father had to sell his mother’s gold jewellery to buy a tractor that Uday could not pay for. That’s when his friend Arvind helped him create a ‘bare-bones budget’ that only included the most basic necessities like rent, groceries, utility bills, EMIs and credit card bills, etc. Arvind advised him to use the 70:30 ratio to divide his income – 30% as savings and 70% to cover for basic monthly expenses. With Arvind as his budget’s ‘goal-keeper’, Uday was able to repay his debts within a year and started building an emergency fund and savings corpus for his future goals.

Remember, if you keep making the mistake of prioritising small, short-term wants over bigger, long-term gains, you will move farther away from your goals. Budgeting allows you to gain financial independence and live a happy, stress-free life by enabling us to live within our means.