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In this episode, Chelsea breaks down some of the most common budgeting mistakes we've seen people make over the years, from not tracking their spending to using the wrong tools.

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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.