Design A Budget Which Works For You

Copyright: akkamulator

Not too long ago, I went shopping at a retail home goods store with a good friend. When we approached the checkstand, my friend experienced a bit of sticker shock, because she kept adding things to her cart and hadn’t kept track of how much she was spending. When I suggested that she might want to review what she had in her cart and perhaps pare down, she responded with, “Well, it will somehow work out. I still have some room on my credit card.” We kept chatting as the sales clerk rang up my friend’s items, and she continued with, “I never know how much I have in my checking account, and I don’t keep a budget, so I always hope and pray that I make it each month.” By this time I was cringing at what my friend was saying, and I also became very concerned for her financial health.

If you are like my friend and choose to throw caution to the wind by refusing to follow a structured budget, you have signed up for a rocky financial future. You may argue that you have the same fixed expenses each month, such as mortgage/rent, cell phone, and your car payment, and that you somehow always know approximately how much you spend on groceries and fuel for your car, but if I challenged you and asked you to itemize those expenses, I would bet that there is some overspending occurring. If you are also forgetting about discretionary expenses like a regular Starbuck’s habit, or even worse, you are neglecting retirement savings or contributions to an emergency fund, then you are skating on very thin ice indeed.

You might be thinking, “But I don’t know how to make a budget!” The whole idea of sitting down and creating a budget may sound daunting, but all it entails is writing down all of your income sources for each month, then creating a separate list of all of your monthly expenses. Once you have the basic framework of your regular expenses, you can add in your occasional expenses, such as personal care items (haircuts, etc.), auto insurance, upcoming vacations, etc. so that you are aware of the need to cover them. If you really dig deep, you will probably encounter hidden expenditures you weren’t completely aware of, such as streaming movie rentals, outdoor dining, or even online subscriptions which you might have forgotten about.

Once you have determined how much money is coming in each month, and how much money must be spent on fixed and variable expenses, you can see which expenses are unnecessary or frivolous, and you can also determine what other financial goals for which you can earmark part of your income. Examples of good financial goals are the following:

  • Paying off credit card debt (make sure that you add your monthly payments into your monthly budget!)
  • Vacation plans
  • Retirement planning
  • Adding to an emergency fund

Once your budget is completed, make sure to refer to it at least once a month, and as you reach certain financial goals (especially paying off credit card debt), you can make adjustments to your budget. Funds which were previously being funneled in one direction can be redirected to another goal, such as cushioning your retirement accounts or emergency fund. I can’t stress enough how important it is to focus on eliminating any credit card debt, because nothing erodes financial security more than this type of debt. Think about it: if you are paying 19.9% APR on a credit card balance of $2,000, that means that the credit card company is making an extra $400 in a year (this is a very rough estimate, since you would be making payments each month on that original balance). The other problem is that most people will add to a credit card balance, which pushes you into deeper debt. With credit card debt, it’s like taking one step forward and two steps back, so if you have credit card debt, HELOC’s, or another high interest debt, your primary focus should always be on aggressively paying those balances down. Once you are free from credit card debt, I strongly recommend that you curtail usage of any credit cards and use cash or a debit card instead.

When you stick to your budget, you may be surprised by how much it will improve your financial picture. A budget establishes a framework which enables you to move towards financial goals you might never have thought you could ever reach. Another great thing about an effective budget is that it doesn’t have to be static, so as your goals change and you reach certain markers, you can make adjustments to further fortify your financial position.

Do Your Finances Need A Tune-Up?

Source: 123rf.com
Image ID : 111332213
Copyright : Tom Baker

 

This year has certainly been full of surprises, partially from the fear surrounding COVID-19, and partially from the economic upturns which have wracked the entire globe. From long furloughs to unemployment, people everywhere are feeling the financial effects.  We are officially in a recession, which makes it even more important for everyone to review their finances and find ways to protect themselves during the financial downturn.

There are general financial guidelines which should always be followed, such as paying down debt, establishing an emergency fund, finding other means to generate income, and continuing to contribute to retirement accounts.  Another vital component in good financial health is establishing a budget and really examining your spending habits.  Almost invariably, people find out after they create a budget that they are spending money needlessly on frills that they don’t need.  By eliminating those hidden money drains, it becomes easier to cover living expenses, thus reducing some of the stress involved in getting by financially.

I have had a budget in place for over 30 years, and I have seen the power it wields.  By following a budget, I was able to pay down all credit card debt, pay off a car, establish an emergency fund, and put money aside for retirement, so I know it can all be done.  Even at this point, with zero debt, I am acutely aware of my budget, and I review it on an almost weekly basis to make sure I am on track.

Source: pigly.com

 

If you need help in establishing a budget, you can use a budget calculator. I found a wonderful budget calculator on Pigly.com which is very easy to use, and extremely thorough.  It helps you break down all expenses, from the essentials to debts and savings so you can target all your goals and ensure that your income is allocated optimally. All you have to do is plug in your income, and the calculator will automatically generate a low end and high end for all the categories.  So even if you have never established a budget before, you can set one up instantly.

When budgeting, don’t be afraid to contribute to your retirement accounts right now, as long as you have your debts paid down and you have an emergency fund in place.  I am a big proponent of Dave Ramsey’s investing philosophy, and I am grateful that I educated myself on financial wellness and dug myself out of what once seemed like a desperate situation.  It was only after I had paid off all of my credit cards and established an emergency fund back in 2013 that I began aggressively started putting money aside for retirement.

Source: 123rf.com
Image ID : 129764462
Copyright : Romolo Tavani

 

The fact is, we are living in uncertain times and need to be prepared for whatever hits.  By buttressing our financial health, getting creative with income streams, and following a budget, we will be better equipped to survive the ebb and flow of the current economy.