10 Budgeting Mistakes Clients Make: Advisors' Advice

7. Underestimating discretionary expenses.

There are two major mistakes I see made when it comes to budgeting and spending. The first mistake I see is that people underestimate their spending on the discretionary aspects of their budget, such as dining out, shopping and even alcohol consumption.

For example, clients may estimate that they can save 15% of their after-tax income per month, but in reality they are drastically underestimating the amount they spend in these areas. This spending bleeds into their ability to save and the 15% becomes 5% or even 0%.

The second mistake I see made is setting a budget, for example at $400 a month, for dining out.

The client is going to go over their budget for the month and they will tell themselves, “Since I am spending $600 this month, I will only spend $200 next month, so it evens out.” This rarely happens, so the budget needs to be reviewed with more discretionary spending going to dining out and being taken from somewhere else.

One simple solution to ensure savings isn’t being chipped away each month is the concept of “paying yourself first.” It is very simple now to have a percentage of each paycheck automatically sent to a savings account or a retirement account.

— Vaughn Kellerman, paraplanner at HCM Wealth Advisors