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The 4 Most Common Budget Mistakes!: Budgeting 101

[pro-player]http://www.youtube.com/watch?v=HCR3e7WYnSw[/pro-player]
When building a budget many people get to the end of the process and are surprised by the amount of money they spend, and or are surprised by how much money they should have left over every month! This is primarily due to the fact they are not calculating their budget properly.

Mistake #1 – Not everything is paid or charged on a monthly basis!

This is the biggest error. If you get paid $2000 bi-weekly you don’t make $4000 a month! You actually make $4333.33 a month! Your hydro bill comes every two months so if you didn’t account for it in your monthly budget you will be short $200 in your budget to pay for it. If you did account for it but included the entire amount in that month, your budget will show you spending more than you really are!

Solution: Identify how often something is paid – to you or by you!

Once you have identified this apply the following formulas to determine the monthly budget amount:

Weekly = $amount  X  52  /12

Bi-weekly = $amount  X 26  /12

Monthly = you don’t need to do anything here just plug it into your spreadsheet

Semi-monthly = $amount  X  6  /12

Quarterly = $amount  X  4  /12

Semi-Annually = $amount  X  2 /12

Annually = $amount /12

Mistake #2 – Not all pay cheques are equal

Many people who have salaried positions will have an easier time with this. Although there are still mistakes made. The most common is that your deduction for Employment Insurance and Canada Pension Plan max out at a certain point (depending on your income). So if you used pay cheques from the first part of the year to calculate your income, you may have underestimated the amount of income you have coming in. Bonuses, commission income and irregular hourly work can also throw a wrench into the numbers.

Solution: Use last years tax return to identify exactly what income you had.

This won’t work for everyone as variable income is hard to predict but try to identify how much you expect to make in a year and divide it by 12.

Mistake #3 – Double counting.

This is typical when people have money taken off their pay cheque for pension or RRSP or other savings. They will tend to list it again when they fill out their budget as it is top of mind! Other examples are when you include eating out or ordering in under entertainment, but also under “food” (i.e. groceries).

Solution: Be sure to start by categorizing each expense only once as you go through your credit card statements and bank statements. Do not start filling in the budget spread sheet until this is completed. If there isn’t a categorie that it will fit into than create a categorie for it. Even more so – be patient and dilligent in preparing this important document.

Mistake #4 – Not including everything!

Without going through a full years worth of statements, it is very easy to miss or forget about some items. Especially those that you only pay once a year! Maybe it is an annual dividend that is paid, or association membership, professional dues, or annual insurance premiums. What ever they are they can really throw a budget out of whack.

Solution: Build an annual payment section to your budget!

This may include memberships, dues, insurance premiums, magazine, newspaper, and website subscritptions, car registration, kids school fee’s, etc.  Once you have grouped them all together take the total and divid it by 12 to add to your monthly budget.

Watch for my book “One Day A Month To Financial Success” due out October 2011!

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