Don't Sabotage Your Own Budget by Making These Common Mistakes

It's no secret that the economy sucks right now. We all know it and most of us feel it. Many people are turning to the tried and true financial assistant, the budget, for help. Few of us are really sure how to make a good budget though--It's almost a lost art like cursive writing. We write down a few bills, the mortgage payment and maybe what we think we'll pay for groceries, but there's much more to making a good budget. I've put together a list of some of the most common budget-making mistakes so you can avoid them and make your budget work.

Mistake #1: You don't know how much you really spend each month. We tend to grossly underestimate how much money we spend and a lot of us are hemorrhaging money without even knowing it. Before you even think about opening up Excel to start your budget, write down every single cent you spend for a month. Get a little notebook, keep it in your purse or pocket and any time you spend money, no matter how insignificant the amount seems, write it down--and this goes for every member of your household if they're spending family money. After you've learned where your money goes, you'll be better able to budget it.

Mistake #2: You don't have a plan. Ask yourself why you're making a budget. Is it because you're living beyond your means and you need a budget to get things under control? Is it because you want to spend more smartly and a budget will help you put money in the right places? Is it because you need to plan for something like a baby, college or retirement? Is it because you feel like you're supposed to (which is not a good reason, by the way)? Having a solid reason for creating a budget will help you stick to it.

Mistake #3: You don't include enough categories. Every budget has the basics: mortgage/rent payment, utility bills, groceries and a lot of people stop after they cover the basics. But what about an entertainment category to cover things like eating out or going to movies? Other commonly forgotten categories are gifts, kids' allowances, prescription medications, doctor co-pays, pet expenses, car expenses like oil changes and yearly inspections, "fun" money and expenses not paid monthly, like personal property taxes, credit card annual fees, or organization memberships. If you don't have an emergency savings fund, it is crucial to have an emergency budget allotment. If you don't use it, deposit it in a high-yield savings account each month (check out Bankrate.com for the latest rates). Not including the less memorable categories will lead to budget overages.

Mistake #4: Your categories are too broad. "Utilities" is too broad. You have to break things down into smaller categories, especially if your budgeting goal is to get a better handle on your spending. If you get a bill for it or make a payment for it, it should have its own category. You may even want to break your grocery category into separate food, household supplies/paper goods, and personal hygiene categories. If you're paying on several credit cards, create a category for each one to keep track of what's going where.

Mistake #5: Your budget is too restrictive. Just like a diet, the more restrictive your budget is, the less likely you'll be able to stick to it. If you're used to spending $5000 a month and you decide to cut back to $2500 cold turkey, you'll probably give it up after the first month, if you even last that long. If your budget-making goal is to spend less, make a plan to cut back gradually.

Mistake #6: Your budget is unrealistic. This is where the initial month of expense tracking comes in. If you allocate $300 for groceries when you actually need to spend $600, you'll end up in the red.

Mistake #7: You aren't accounting for every last penny. A budget will only succeed if you know where every single penny is going. If you don't, how will you know how much money you have to spend?

Mistake #8: You don't stick to it. This one is obvious, or at least it should be. People tend to think that just making the budget is enough but it's not. You have to actually stick to it to make it work! If it's not working, re-evaluate it; or decide to re-evaluate it every three or six months to see if it's still working for you.

Mistake #9: You don't do your accounting. Making the budget is the first step, and an important one. But a budget is nothing without the monthly accounting to go with it. Remember back in the olden days when people actually wrote every transaction in checkbook ledgers and balanced their checkbooks? You need to do it too. The more often you can do your accounting, the better. Every day is ideal, but it's not always realistic. So vow to sit down once a week and do the number crunching. There are many different ways to keep track: programs like Quicken and Microsoft Money, free websites like Mint, Wesabe, and Quicken, and some banks offer similar features through their online banking. Websites offer up-to-the-minute tracking of all your accounts, including credit cards, investments and brokerage accounts, checking accounts, even your car loan and mortgage. Take advantage of what's out there, it will improve your budgeting abilities if you use all the tools you can.

Mistake #10: You're too hard on yourself if you make a mistake. It's not easy to make a good budget, especially if you've never made one before. In addition to the mistakes I've already listed, there are smaller mistakes anyone can make, like simply adding incorrectly, or forgetting to account for what you spent on your anniversary dinner (but that could be caught if you do your accounting regularly!). It's okay to make mistakes as long as you learn from them.

A finely crafted budget can help you turn your financial situation around--if you use it. Once you know where your money is going, you'll be in a better position to control it. Avoiding the most common budgeting pitfalls will give you an even better chance of succeeding.