Common Budgeting Mistakes and How-to Avoid Them

Most people have their first taste of money management during their high school and college years. This is the time when most young people use their first debit/credit cards, take out their first loans, and write their first checks. However, this is also the time when young people make budgeting mistakes that can leave long-lasting effects on their financial standing. These are 5 common budgeting mistakes and how you can avoid them before they happen.

1. Failing to Keep Track of How Money is Spent

Ask anyone who is financially well off about their secret to success, and you will likely hear advice pertaining to living within your means. Any given person has likely struggled with overspending at least once or twice but too much of it can land you in deep trouble. A great way to nip overspending in the bud before it has a chance to do significant damage is developing a personal spending plan.

The purpose of this type of plan is to compare your expenses with your income and ensuring that what you’re spending isn’t eclipsing what you’re earning. When you can achieve a profit from your income vs. your expenses, you can rest assured that you aren’t overspending.

2. Forgetting the Difference in Needs and Wants

Too many young people fall into the trap of running out of money simply because they haven’t fully examined the types of expenses they have. Pretty much any expense can be filed under one of two categories: a need or a want. For example, while food is an obvious need, a coffee shop latté is a want. Of course, when life becomes stressful with school and work, a latté can seem like a bare necessity. The good news is that you can still nurture your wants without breaking the bank. In this instance, you can avoid the coffee shop altogether and brew your own coffee in the mornings for a fraction of the price.

3. Taking Advantage of Credit

Once a young adult turns 18, they become eligible to enroll in credit-based offers. The credit card applications start flooding in through postal mail, and for young people who are new to finances, this can lead to trouble.

Simply put, you should avoid credit unless you are financially capable of handling the monthly payments in a comfortable manner. As a rule of thumb, if you have any feelings of doubt or confusion on whether you’ll be able to handle the costs that come with a credit card, it’s wise to forego getting one. Using credit unwisely (making large purchases, missing payments, and allowing the balance to grow higher over time) ultimately leads to a lowered credit score which affects so many other aspects of your finances. For example, foul play with credit in your younger years can lead to increased difficulty in your later years with obtaining home/car loans and obtaining new accounts of credit.

4. Taking Advantage of Student Loans

Once you begin college, you’ll likely begin the process of applying for loans to help cover some or all of the expenses associated with school. In some cases, lenders will offer an amount that exceeds the actual amount you needed for expenses. Too many times people fall into the trap of accepting these overages in the form of “refund checks,” which are then spent on wants rather than needs. This is fine in the moment, but once the program is completed, the loan repayment letters and payment forms will begin arriving. Borrowing too much can lead to difficulties in the future with repaying the loaned amount(s). While applying for college loans, keep tabs on your actual expenses, and be sure to accept only the amount necessary for covering your immediate school expenses.

5. Living in the Moment

As a young adult, you likely know what living in the moment means. For example, envision yourself in a social setting with your friends. Somebody proposes going out to eat at a pricey restaurant. The group is already having a good time, so what can possibly make this moment better than grabbing a bite to eat with your friends? Everyone agrees, and you initially do as well, even though you know deep down you aren’t exactly financially situated to afford this kind of expense. The simple answer to these types of situations is to just say no. Sure, you want to be involved and do things with your friends, but it’s okay to draw the line when certain activities start cutting into your budget. Additionally, keep in mind that at the end of the month when your bank account is looking scarce, you’ll be thankful you saved that extra $20-$30.

As time marches on, you’ll learn that not much feels better than knowing you have a firm grip on your finances. It’s a good idea to practice health management with your money at all times so that you can always remain in the habit of doing so. As you become better at conserving your money, your savings will grow in the long run, and you can even help your friends make better choices with their finances as well!

Alex Briggs is a contributing writer for NJS Realty.

Image by Daniel Jędzura via 123RF

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