Four Common Budgeting Mistakes (And How To Avoid Them)

Most people think budgeting is about money. Budgeting is actually about SMART goals (Specific, Measurable, Attainable, Relevant, Time-Bound). Money is simply the tool a budget uses to achieve those goals. First the SMART goals need to be identified before the money can be defined to accomplish them. Here are four budgeting mistakes you may be making:

  1. Making the budgeting goal a dollar amount

It is completely illogical to set aside a certain amount of money without knowing why you are setting that money aside, yet this is what most people do. The goal has to be what you are spending or saving money FOR…in other words, the outcomes you are seeking to achieve.  If you are starting a business, you should know approximately how much is needed to spend up front but to know that, the actions needed to start the business must first be identified. The goal is never the dollars; it is the purpose or reason behind the dollars.

  1. Wishful budgeting

In order to create a budget, start with how much money is currently being brought-in on a monthly basis. This may seem obvious, but the amount of earnings included in the budget needs to be the actual amount being made, not what is hoped to be made. That way, if you end up making more, there will have a surplus which is never a bad thing.

  1. Budgeting backwards

Here is how many entrepreneurs create a budget: first, they add up all of their expenses (e.g., office rent, car payments, utilities, etc.) and subtract that from the amount of money they make in order to see what, if anything, is left over. The leftover amount is what gets divided amongst equipment purchases, investing in a business, etc. This, however, is completely backwards and leaves most people with very little left.

Instead, start with the amount of money needed to achieve the business goals. Then the amount left over gets divided amongst the daily living needs. For example, an artist must first figure out how much it costs to be a successful artist — materials, supplies, distribution costs, branding and marketing, social and digital media, etc. Then the artist subtracts the costs needed to fund what it takes to be successful from their income. The remainder is what there is to spend on rent, food, clothing, etc. 

  1. Forgetting to invest in the person

Budgeting always seems to prioritize the material goods in our lives: a bigger office, nicer company car, expensive clothing, etc. While these things may bring temporary joy, the truth is that they do very little in terms of long-term happiness or creating a fulfilling life. For example, budgeting for continuing education and developing new skills, creative endeavors and relationship-building are all ways to invest in happiness.

For true budgeting success, make sure: the goal is not a dollar amount; base the budget on what is currently being earned; start with the amount of money needed to achieve SMART goals; and don’t forget to invest in the person.

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Copyright ©John Trenary 2022. All rights reserved.

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