Whether you’re just starting to earn money, or you’ve been at it for years, creating a budget can be uncomfortable and difficult. However, it doesn’t have to be! By following the simple steps below, you can start living on a custom tailored budget and reaping the rewards of financial stability.
Step 1: Strategize
First, collect bank statements from the previous month, any receipts you may have, and a list of monthly bills. Determine where your money goes and set up categories for each expenditure. Some examples include housing, vehicles, insurance, groceries, gas, savings, and entertainment.
Now that you know where your money typically goes, accept the fact that you can’t have it all right now. Decide where you’re spending more than you’d like and set up percentages or amounts accordingly.
Step 2: Save
One of the biggest detriments to a budget is the lack of savings. When an unexpected expense occurs, from where do you pull the money? Hopefully, your savings account! Most businesses have the capability to deposit your money into various accounts. Check with your employer to see if they offer this feature. If so, take advantage of it! Since the money does not hit your regular bank account, soon you will not miss it.
If this is not an option, automatically transfer money from your checking account to a savings account. Pay this monthly or bi-weekly like it is a bill. Doing so ensures you have significant savings when a crisis occurs. Once you have at least two months of emergency money saved up, you can begin allocating part of your savings to other things. For example, if you need some home improvements, you can save for these instead of borrowing the money.
Step 3: Spend
You have your plan, and you’ve put up your savings. Now it’s time to spend! Begin each week by paying your bills and dividing the rest of your money into categories. Make purchases in cash as often as possible. Using an envelope system has increased in popularity in recent years. In this technique, money for each category is placed in an envelope to keep it separate. Most importantly, find a system that works for you.
Step 4: Start Investing
When planning a budget, make sure you allocate a portion to investments. This money will work for you and earn more money for retirement. Unless you are investment savvy, you will most likely need to hire a professional financial advisor. This individual or firm will assess your situation, probable length of employment, and financial requirements at retirement. They will develop a plan to invest your funds accordingly.
If hiring a personal financial advisor is not feasible, consider an online financial advisor. They manage your monetary investments using complex software and algorithms. While compiling your research, remember to compare companies before making a decision.
Step 5: Shrink Debt
Now, you are ready to tackle your large debts. First, decide which accounts you would like to tackle first. Two options exist.
Smallest Balance First
With this method, you decide on an amount to pay toward your total debt. You pay the minimum amount on all of your accounts, except the one with the smallest balance. On this one, you pay the minimum plus any extra in the debt fund. Paying off the lowest balance first allows you to feel the satisfaction of paying something off quickly. You then add the amount you were paying to the second lowest balance until everything is paid.
Highest Interest Rate First
This approach differs because you start with the debt that accumulates the highest interest. Theoretically, this method will save you money in the long run because you pay less interest over the course of the loans.
Creating a livable and realistic budget is possible, as long as you think it through, and stick to your plan. Remember to re-evaluate as necessary and allocate some money to fun!