Budgeting and Saving
Creating a budget is one of the first steps to financial independence. Being financially successful starts with knowing your income and spending habits. Although budget is often a word no one likes to hear, having a realistic budget (or spending plan) is the first step in learning how to manage your finances.
Create a budget
If you're looking to reduce/eliminate debt and stop living from pay check to pay check, then creating (and sticking to) a budget is essential. Follow these steps to create a budget that you can stick to:
STEP 1: Track your expenses for a month
You can't know what to budget for if you don't know your spending habits. For a whole month, track each purchase you make; from rent, cellphone bills, to gasoline and food and even your coffee from Starbucks.
STEP 2: Categorize expenses
Now that you know what you spend your money on, start putting these expenses into categories. Some categories could be: rent/mortgage, insurance, utilities, food, gasoline, school expenses, entertainment, dining out, savings, and credit/loan payments. Make a note if some of these are fixed (i.e. rent payments are the same every month) or variable (i.e. grocery bills, gasoline expenditures).
STEP 3: Total your monthly income
Figure out all sources of income for the month. If are a contract worker and your paycheck fluctuates, figure out an average monthly income.
STEP 4: Total you monthly expenses and compare
Now that you know your monthly income and expenditures, do a comparison. Find out if your income is greater than your expenses or vice versa.
STEP 5: Make adjustments to your expenses
If your income exceeds your expenses, make sure you are paying yourself first. What does paying yourself first mean? This means that the first thing you do when you receive a paycheck is put a certain amount directly in your savings account. You place this money into savings before using the rest of your check to pay for other expenses. You can also decide to set some of the extra money aside to pay down consumer debt like credit cards or student loans. If your expenses add up to more than your income, you recommend that you evaluate your spending habits and make adjustments to spend less. Once you set an a maximum amount you are allowed to spend for each category, stick to it! Some may find that using cash or limiting trips the to ATM can help you stay on track. Remember to prioritize your needs versus your wants and spend accordingly.
STEP 6: Review your budget monthly
Now you've made your budget but does it work? Check your budget monthly to see if you need to make any other adjustments. If you find that you regularly overspend in one category, update your budget. Remember your budget is not set in stone you could always make updates!
Saving for an Emergency
Setting aside emergency savings with enough money to cover your basic living expenses for three to six months should be a primary savings goal. This money should be kept in an easily accessible savings or money market account, not in a long-term investment asset. Only use the money in the event of an emergency, such as unexpected medical bills or losing your job.
Once you've established an emergency fund, you can begin saving money to reach other goals, such as buying a new car, funding your child's education, or establishing a retirement fund. Smart About Money's Emergency Fund Plan Course is a great way to begin preparing for your emergency fund.
Smart About Money also offers courses such as, Spending and Savings Basics Course and a Financial Well-Being Course. CashCourse® is an additional site that offers many resources in order to help you set up and maintain your budget. Below are a few resources that may be helpful.