The verdict is in: You need to get on a budget if you want to save money.
While reading that last statement, you might already be thinking: “But I am already living on a budget.” Chances are, this is not entirely true.
Depending on what sources you look at, there is evidence that nearly 2 in 3 adults don’t know how much money they spent last month. And while some Americans wrestle with the fact that they live on a budget, the 2019 government shutdown and the 2020 pandemic proved anything but that.
During the first-quarter government shut down in 2019, it was reported that almost 8 in 10 working-class adults were living paycheck to paycheck. The COVID-19 pandemic has certainly caused financial stress for many too. Other articles and studies over the years have shown that roughly 50% can cover a $1,000 emergency or have at least $1,000 in savings.
And while many adults express the desire to budget properly and save more, their good intentions are not always met with the proper action because of some of these all too common misconceptions about budgeting and saving.
Here are 10 of the most common misconceptions about budgeting and saving, and how you can learn from them in order to be more financially savvy:
1. I Don’t Have the Time
The number one reason why most people don’t have a budget is they often use the fatal time excuse: “I just don’t have the time to sit down and write out a budget.”
No one has more time; we have to make the time. Don’t make budgeting complicated.
Using time as an excuse to not budget and save is simply that — an excuse. We make time for the things that matter to us, and with countless ways to budget these days, it doesn’t have to take hours of our life.
Creating a simple budget starts with wanting to. Put your phone away, turn off your TV, and explore different budgeting techniques — and try a few. Perhaps you will like handwriting your budget, but then again, you might like using an app.
First, start with recognizing that if you work on average 2,000 hours per year, carving out one hour per month (12 total hours) to budget and track your spending isn’t that hard. However, if you keep telling yourself you don’t have the time, you won’t make the time.
To get over the all too common time excuse, schedule a time to sit down and work on your budget each month. Typically, it’s best to tailor this towards the end of the month so you can reflect on your monthly expenditures and set some new goals for the next month.
2. I Keep My Budget in My Head
If it isn’t the time excuse for budgeting, oftentimes, it’s the “I have a budget in my head” that gives us a false sense that we are on top of our finances.
This isn’t to say that someone can’t budget in their head, but referencing the survey from earlier that 2 out of 3 people don’t know where their spending goes each month, chances are we might be fooling ourselves.
Budgeting is more about the awareness you create than knowing how to be super savvy financially. To adjust and change any behavior (finances are almost always behavior), we first must get an accurate gauge of our current habits!
Make a written budget. Once you schedule each month to budget, please go through it and create awareness around your spending. Similar to how some track their calories when they’re looking to get in shape, do the same to get your finances in shape!
To create a written budget, follow these steps:
- Grab some paper and something to write with.
- Make spending categories that are fixed and variable.
- Next, take your previous month’s bank statements and itemize spending.
- Adjust your budget accordingly and set spending parameters.
- Using your new budget targets, use a budgeting app like Mint to track spending for you.
3. I Will Start Saving in the New Year
Starting is great! However, a start date typically implies an end date. And all too often, adults make saving and budgeting a New Year’s resolution.
In fact, saving more money is one of the top three resolutions each year. But the issue with most New Year’s resolutions? Most of the time, we don’t make it past month one!
A Gallup Poll from 2018 shows that most people would prefer to save instead of spend. Still, many of us underestimate the psychology behind resolutions and what it truly means to resolve. Waiting around to start something is actually putting more pressure on yourself instead of just doing it.
Use dates for your goals, but don’t use dates to start. Instead, use these tips below.
Implement the pay-yourself-first strategy instead of setting another New Year’s resolution. Pay-yourself-first is vital for budgeting and saving, and as author David Bach says, “It’s automatic.”
To pay yourself first, follow these steps:
- First, identify your monthly take-home income.
- Next, write out a budget, identifying your fixed expenses, debts, and variable expenses.
- Cut out any wasteful spending and determine your discretionary income.
- Of your discretionary income, decide how much you want to “pay yourself,” aka save.
- Automate it. If you want to save $400 per check, make it automatic, so you don’t tempt yourself to spend.
4. Investing Isn’t Easy; You Will Lose Money
Investing might be one of the most overused words of 2023. However, the term investing is vague and nebulous. In other words, investing can mean a lot of different things.
Who hasn’t heard of:
- Stock Index Funds
- Option investing
- Life insurance investing
- Gold investing
But which is best for you?
The list of investment opportunities is overwhelming, and it’s easy to see why there is a misconception you will lose money if you don’t know what to do or what to invest in. However, that doesn’t mean investing can’t be safe and simple.
Where most people get confused with investing is they think they have to have lots of money, take lots of risks, and have know-how to invest in individual stocks. Yet, if you enroll in a work-sponsored 401K, you are technically investing!
Don’t always think investing is a bad thing — Investing can be safe when done correctly!
To invest for the first time, it’s pretty simple, and you can start with investing $1,000. Don’t try to be fancy. Consider one of the following:
- Find out about your work-sponsored 401K or retirement program and enroll.
- Look into opening an individual retirement account or IRA if work doesn’t offer one.
- If you want to learn about investing but feel confused by stock markets, look into stock index funds and ETFs instead. These are well-researched funds made up of hundreds of individual stocks and are considered conservative, safe bets.
5. I Don’t Have Enough Money to Save
There is a misconception that if you don’t make enough money, you cannot save. This is not true.
While it will be more challenging — and perhaps you won’t save as much as you would like — keep in mind that the only way to improve your situation is to change your situation. Saving and budgeting can help.
“You don’t have to be great to start, but to be great — you must start!”
Flip your mindset! Instead of telling yourself that you can’t save, what you should be saying is that you can’t work so hard and NOT save.
Instead of telling yourself you can’t save because you don’t make enough, tell yourself you don’t make enough, and that is why you do save.
Besides talking savings up, consider making extra money with the hustle and gig economies and directing 100% of what you make to savings. Making an extra $50 per week to save means you would be saving $2,600 a year! Invested properly, that $2,600 could be worth over $20,000 in 30 years!
6. I Am Good with Money Already
There are only a few people in life that can say they’re good with money already. Most of them are on the Forbes Top 100 list.
In all seriousness, thinking you’re good with money and don’t need to get better is like thinking you went to the gym last year so you don’t need to go at all this year. Adopt a better outlook and recognize that always stretching yourself is better than the alternative — complacency.
Lastly, nobody likes a know-it-all!
A common money misconception and taboo topic is talking about money. So it is hard to sometimes find yourself in good company when it comes to talking about money.
To avoid thinking you already know it all, see about creating some sort of accountability group with others who are successful financially. Another option is to look into creating a wealth team that consists of a financial planner, a tax strategist, accountant, and other professionals in those arenas who are experts. These experts can give you proper guidance.
Lastly, don’t be afraid to check out personal finance books and finance blogs to further your understanding of the topic of money.
7. Budgeting Is Just Too Restricting
We have all heard someone say that they don’t budget because they don’t like it or it’s just too restricting.
Truth be told, we confuse what true freedom means. We often think freedom means living freely and carelessly, but true freedom is often the result of discipline, and budgeting is a great form of self-discipline.
If you couldn’t tell, many of these “Try This” tips are focused on behavior and psychology. That is because lots of our money habits are just that — habits. Instead of looking at budgeting as restricting, look at budgeting as a source of freedom.
- Budgeting frees you from stress.
- Budgeting frees you from financial worry.
- Budgeting frees you from debt.
- Budgeting can allow you to get things you truly covet.
8. I Save Enough Money
There is an interesting misconception about saving out there that some adopt: “I save enough already.”
While that may be the case for a select few, for the majority of adults who still live paycheck to paycheck, chances are higher that they’re actually not saving enough.
A quick way to know if you’re saving enough is to take your monthly income and divide it by five (or 20%). Are you saving that much each month? For example, if you bring home $4,000 per month, you would want to make sure you’re saving at least $800.
Another way is to look at savings by age charts to see if you’re on track.
Instead of telling yourself you save enough, instead set bigger and better saving goals with rewards attached. For example, you can buy something you really enjoy, such as new shoes or new camping equipment, once you have a six-months emergency fund.
Make a game out of saving and you will save more and enjoy the rewards that much more too!
9. I Make Too Much to Budget
There is an infamous phrase in the financial planning circles called “Lifestyle Creep.”
Lifestyle creep, or lifestyle inflation, refers to those who spend more money as they make more money. While this might not seem like too bad of a thing on the surface, it can be extremely problematic for many reasons.
For starters, the increase in discretionary income shouldn’t correlate to an adjustment in spending habits or a right to spend, but instead, the right to save more. While this goes against some of the popular social norms of living lavish, making too much money doesn’t make someone too good to budget.
In fact, the right frame of mind is a frame of mind that says: “As I make more, I will save more.” Of course, this starts with never thinking we are too good for a budget. And here is why it all matters: Nothing in life is guaranteed.
Sure, you might make a lot now and for the foreseeable future, but it’s best in life to prepare than to have to repair down the road. Just look at the number of adults who can’t retire even though they thought they were doing it right!
Adopt a “save it before you spend it” mentality when you get a raise of windfall.
If you’re fortunate enough to get frequent raises — or perhaps you land a few bonuses and promotions each year — don’t spend it, save it!
Instead of thinking, “I got a raise, more to spend,” consider doing the following once you calculate your raise:
- Roll a certain percentage of your raise into your IRA.
- Use the month to pay down debt, not take more out.
- If you’re on a budget (as you should be), pretend the raise never occurred and save the new money.
An extra $100 per bi-weekly paycheck is an extra $2,600 per year. That can really add up over time. It’s best to remember that the average millionaire budgets. Don’t ever think because you make more, you don’t have to.
10.Yeah, but I Have a 401K!
The definition of “misconception” is a “view or opinion that is incorrect because it’s based on faulty thinking or understanding.” This couldn’t be more true when it comes to adults and their 401Ks!
Enrolling in a work-sponsored 401K is a great idea. There is no debating that. But it’s a huge misconception that just because you have a 401K, you don’t need to be saving more. Most financial circles recommend saving at least 20% of your income.
Saving 20% of your income refers to your 401K, but also other forms of saving or investing. However, often simply contributing 3% or 6% of our income to our 401K isn’t enough — even if we think it is.
Don’t fool yourself into thinking your 401K will be enough for retirement. With fewer tax advantages once you hit retirement age, look around and see how many people you know who are actually fully retired as a litmus test.
We all have a common money misconception because we tend to think that we are doing better than we really are. So instead of thinking you’re good financially just because you have a 401K or IRA, instead, use the 20% rule of thumb.
In other words, you should be saving at least 20% of your take-home income each month. This can mean general savings, investing, retirement — whatever. Either way, make sure it is at least 20%.
To help, if you’re not at 20%, set a goal (using a budget, of course) to increase your saving contributions by 1% each month until you reach 20%. This allows you to ease into increasing your savings without overwhelming yourself.
Sometimes we feel bad about our finances and what we are not doing, resulting in us avoiding the topic of budgeting and saving.
Hopefully, what you took away from this article is that you’re just a few mindset tweaks away from being able to really start hitting some of your financial goals. As we part, consider these last few tips:
- Don’t let misconceptions dictate your finances. You dictate them.
- A written budget is always better.
- You can increase your savings rate by 1% each month.
- Investing just $4,000 a year over a 40-year period puts you on track to have a million dollars!