The holidays are around the corner. Get ready for parties, plane trips, gift exchanges…and plenty of expenses that will take a serious bite out of your paycheck. So if you’re part of the two-thirds of people who don’t have a household budget—or you set one up but haven’t stuck to it—now may be a good time to get your spending on track.
Before you dive in, though, make sure you’re doing it right. “Our brains are not wired to plan for the future, so you are forcing yourself to do something that goes against your neurobiology,” says financial therapist and Certified Financial Planner Brad Klontz. As a result, we often fall into traps that lead to unsustainable spending plans.
Don’t want to be a casualty of bad budgeting? Avoid these seven common mistakes.
“Most people approach budgeting like a diet—it triggers a sense of deprivation,” Klontz says. “As a result people tend to avoid doing it, slide back into overspending or be sloppy or dishonest with themselves when looking at the numbers.”
Instead of focusing on areas you can trim, Klontz suggests kicking off the process by thinking about what you’re ultimately saving for—whether it’s traveling more, buying a car or upgrading your apartment.
“Reframe it as a spending plan, not a budget. That gets you passionate and excited about achieving your goals,” Klontz says. “Then slice up your pie to make sure you’re working toward what matters to you, and cut all the stuff that’s not important.” Once you’ve engaged the emotional part of your brain by establishing your priorities, slashing expenses should be a lot easier.
Automate as much as possible, Klontz says. “The more work you have to do each month to put money aside, the more likely you are to stop doing it.”
You can start by setting up automatic bill pay, transfers to your savings account and contributions to your 401(k), IRA or kids’ 529 plans.
Related: Automate Your Way to Wealthy
No matter how committed you are to sticking to your spending plan, almost everyone slips up occasionally. Klontz remembers one client who couldn’t stop splurging on travel. He always had a rational reason—say, to visit his sick parents—but he was in denial about his habits. As a result, he underprepared and overspent.
Be honest by completing the following statement: “If my budget were to fail, it would be because of ___.” Then plan what you can do to prevent yourself from caving—whether that’s calling a friend who’ll help you stay strong, waiting 24 to 48 hours before pulling the trigger or cutting back in other areas now so that you can spend more here later without derailing your budget.
When tallying up expenses, most people analyze the last few months of bills and purchases. But they blank on non-monthly costs like auto insurance, lawn care and property taxes. “In addition, what people consider unanticipated emergencies are actually totally predictable,” Klontz says. If you’re a car owner or homeowner, for example, odds are you’re going to have car trouble and need home maintenance at some point during the year, so budget a little extra for unexpected expenses like those.
Klontz recommends reviewing a year’s worth of spending for non-monthly or non-fixed expenses to get a sense of what else to add to your budget. If you fork over an annual $1,800 auto insurance fee, for example, divide that by 12 and set aside an extra $150 each month in savings so you won’t scramble when the payment is due.
After juice-cleansing for a week, you might find yourself raiding the kitchen at midnight for Ben & Jerry’s and frozen pizza. The same binges can happen if you’re on a hardcore financial diet.
“Some people become so alarmed when they total up their [expenses] that they…move the needle too far to the opposite end,” says financial therapist Megan Ford, president of the Financial Therapy Association. “Not only does strict budgeting file down your willpower, but it also tricks you into thinking that because you’ve been so responsible you deserve a splurge.”
The key is finding a balance between having fun now and saving for the future. The mix is different for everyone, so play around with the numbers until you find a sustainable combination.
On the same note, while it may sound like a good move to assign a task to every dollar you earn—even if it’s a good mix of priorities and entertainment—this won’t do you any favors.
“People need to allow some flexibility for unexpected expenses, leisure activities and even small rewards,” says Divam Mehta, Certified Financial Planner, founder of Mehta Financial Group in Glen Allen, Va. If you don’t leave yourself a cushion, you’ll be forced to dip into your emergency fund or rack up credit card debt to cover unanticipated purchases. Mehta suggests allocating around 20 percent of your income for variable expenses like these, then saving or investing any that’s left at the end of the month.
It’s great to aggressively reduce your spending to reach your goals, but certain cutbacks will sabotage your efforts in the long run. “Often, clients will remove or downgrade their health or life insurance policies, which can have devastating long-term ramifications,” Mehta says.
Another mistake people make when paring down expenses—particularly to pay off debt—is funneling funds away from their 401(k) or IRA. But that torpedoes future wealth accumulation, thanks to lost opportunities for your money to grow. “A portion of your income should go toward debt, and once you have an emergency fund built up, some should also go toward [retirement]—it’s not an all-or-nothing proposition,” Mehta says. “And contributing at least up to your employer’s match in a 401(k) is a no-brainer.”