by Maurie Backman | July 12, 2019
Though Americans are often said to be notoriously resistant to the notion of budgeting, an estimated 67% of households actually follow a budget. And that's a good thing, because budgeting is one of the most effective financial tools out there.
Without a budget, you might struggle to understand where your money is going month after month. And staying in the dark could make it difficult for you to meet financial goals, avoid debt, and make the most of your earnings.
That said, your budget isn't going to serve you as well as it could if it's not set up properly. Here, in fact, are three things that may be missing in your budget.
You probably remember to list key expenses like rent, transportation, food, and electricity in your budget. But what about savings?
Ideally, you should be setting aside 15% or more of your income for retirement on a regular basis, unless you don't have an emergency fund, in which case you should save every dollar you can until you've amassed three to six months' worth of essential living costs in the bank. But assuming you do have emergency savings (never hurts to be optimistic), contributing to a retirement plan is something you should do consistently.
Now, if you have a 401(k) through work, you can sign up to have contributions deducted automatically from your earnings. Once you do that, you won't need to worry about factoring savings into your budget (unless there's another goal you should be setting funds aside for, like buying a home), because the amount you receive in your paychecks will reflect your earnings after making those contributions. But if you're planning to fund an IRA, your employer can't deduct those contributions, so you'll need to set aside money each month for your nest egg. And you'll need a line item in your budget for savings to remember to do that.
It's not just recurring monthly expenses that need to go into your budget. You also need to account for annual expenses, and save for them during the year.
What expenses might you face on a once-a-year basis? If you own a vehicle, you might pay a single yearly registration fee. Similarly, you might pay for a roadside assistance plan whose fees are due on an annual basis. Certain types of home maintenance can also creep up once a year, as can things like professional license renewals, subscriptions, and warehouse club memberships.
If you don't allocate money in your budget each month for these expenses, you might struggle to pay them once they come due. Therefore, if you have, say, a $300 license that expires every April, setting aside $25 a month for it will ensure that you can cover that expense in full.
The cost of living tends to rise over time -- we can thank inflation for that. And your budget needs to reflect the fact that expenses of yours have gone up.
Imagine you have an apartment lease that's set to expire mid-year. If your rent typically goes up $50 a month upon renewing it, and you're paying $1,200 a month at present, you can't just assume you'll only pay $1,200 for the remainder of the year. Similarly, your cable plan might get more expensive once your introductory rate runs out, or your auto insurance premium might go up if you get into an accident. Therefore, be sure to review your budget regularly and make adjustments as your living expenses increase.
Of course, you may find that certain expenses of yours go down along the way. If that happens, great. But unfortunately, you're more likely to land in the former scenario of seeing an uptick in living costs.
The more spot-on your budget is, the more useful it will be. Remember these important items in your budget -- you'll be thankful you did.
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