You should think of a budget as a tool to get you closer to
your personal goals. It allows you to do a better job of putting
your money to work.
Create a Budget—and Pay Yourself
The first step to responsible saving and investing is getting a handle on your expenses. Unexciting as it sounds, the best way to do so is to write down what you and others in your family earn, and what your monthly expenses are. It’s not a bad idea to keep a running log of all income and expenses, even the little ones, for a couple of months. By identifying and eliminating unnecessary extras, you might find that you have more resources than you previously thought.
5 Steps to Budgeting Success
Successful budgeting is key to good financial health and it really isn’t hard. It just takes some thought and time. These five steps will help create a budget that’s not only realistic, but is successful as well:
1. List your expenses
Make a list of your fixed expenses such as mortgage or rent payments, car payments, insurance payments, etc. After that, make a list of your variable expenses (the one’s that don’t have each month or the amounts vary). These include expenses for dining out, dry cleaning, hobbies, and other bills or expenses that don’t have a consistent payment. Take the time to review three to four months of bank statements and check registries to help you calculate estimated figures for these expenses. This is vital successful budgeting.
2. Separate your wants and needs
After you have made your lists and can see where you’re spending your money, check those lists for places you can curb costs or eliminate them entirely. This is especially important to successfully budgeting to eliminate debt or save money toward a specific goal. Any place where you see you’re clearly wasting money, get rid of it. In order to do this you may have to track your daily spending for a period of time to get a sense for how much you are spending on things like eating out for lunch or stops at Starbucks.
3. Make sure your expectations are realistic
The objective of a successful budgeting is to help you plan for actual expenses while at the same time setting goals for spending that will allow you to save money.
4. Consider using budgeting software or Apps
Part of the reason you do this is, of course, for guidance in successful budgeting. It helps you understand the expenses categories and helps you map out strategies for successful budgeting. Another part of it, though, is psychological. By using budgeting software, you mean business when it comes to your budget and saving goals. Try Mint, or Quicken two of the most popular.
5. Get your family on board
For the most successful budgeting possible, everyone in your family needs to know and understand the budget. It won’t do any good to create a budget if your husband or wife isn’t aware of it and continues to spend money in ways you haven’t planned for or on things you haven’t made allowances for in your budget. And it’s never too early for kids to develop money skills and to know that there are limits to how much money you can or will spend. So the earlier you get them started, the better.
Saving and investing are essential to financial security. If you are spending all your income (or worse, spending more than you make by running up debt) and never have money to put away, you’ll need to find ways to reduce your expenses or make additional money. This generally requires making some tough choices such as cutting back on dining out or foregoing nice-to-have extras such as a new car or a family vacation—or it may mean taking a second job.
To free up money for saving and investing, it’s sometimes helpful to segment current and planned expenses into those that are essential (needs) and those that are non-essential (wants). For example, buying a crib for a new baby is essential, but cable TV is something nice to have that perhaps can be postponed while you are getting your budgetary house in order.
Pay Off Credit Card or Other High Interest Debt
Few money-management strategies pay off as well as, or with less risk than, paying off all high interest debt you may have. You pay the very highest rates if you are borrowing money through so-called “payday lenders.” If a payday lender’s rate sounds reasonable, that is likely because it is being quoted for a very short period—sometimes just a few days—rather than at the actual annual rate that a bank would have to disclose.
Using credit can have advantages and disadvantages. If you spend within your means and pay off your balance on time and in full each month, credit cards can serve as a safe, convenient substitute for cash—with the added bonus that they can help you establish and maintain a solid credit history. But if you use them to purchase items you couldn’t otherwise afford—or max out your cards to cover routine monthly expenses—credit cards can quickly compound your debt.
Many credit cards charge interest rates that run as high as 1.5 percent a month—18 percent annually—which can add up quickly if you don’t pay off your balance in full each lending cycle, usually one month. Consistently carrying over your balances can result in even higher rates being charged over time. If you owe money on your credit cards, the wisest thing you can do is pay off the balance in full as quickly as possible. Otherwise, money that could be going into an interest-bearing savings account is going to pay interest instead.
Paying only the minimum balance due each month can land you in a perpetual cycle of debt. For example, let’s say you have a $3,000 balance on a credit card that charges 18 percent APR and requires a minimum payment of 2.5 percent each month. Assuming you charge nothing else, it will take you 327 months—more than 27 years—to pay off your debt. In addition, the total amount you pay in interest for that $3,000 charge will be $5,404.34—and your total bill will be $8,404.34.
Once you have paid off your credit cards and any high-interest, short-term loans, you can create a budget that includes money to save and invest. That will allow you to chart a course to financial security. To get started, consider adopting this healthy practice: Pay yourself something each month when you pay your household bills. A desirable number to shoot for is a personal savings rate of 10 percent—but if that amount isn’t realistic for you at the start, don’t be discouraged. Any positive savings goal is better than allowing consumer or credit card debt to mount.
Floyd Saunders is the author of several books covering personal money management and investing, including, “Figuring Out Wall Street”, “Family Financial Freedom”, “Ten Steps Money” and “Common Sense Money”. You can learn more about him at www.saunderslearninggroup.com.