Gain Control of Your Life With a Budget: The Importance of Financial Awareness & Literacy
While there is certainly more to life than just money, one of the primary ways to use it wisely and to your benefit is through establishing a budget. While budgeting can be unentertaining and tedious to understand, and cutting costs can be a drag, it's imperative to get a handle on your expenses now so you're in control of where your money goes and can build long-term wealth.
How to Get Started
The quickest method to get started is to list all of your current expenditures. Whether you use an Excel spreadsheet or sit down and list everything out by hand, externalizing this information brings greater insight about your "needs" vs. your "wants." Don't skimp on this part, and make sure to list everything, including your gym membership, daily coffee, dining out, monthly bills, and clothing. You'll also need to look at the shared finances you and your partner have, if you have one.
Determine Essential Fixed Costs
Next, determine which expenses are your essential fixed costs. These include housing, utilities, and any existing loans. Separate these expenses from your expenditures that tend to vary such as monthly groceries, dining, and entertainment. However, make sure you have a total amount for all your expenses, because you'll need to subtract that number from your regular weekly or monthly income.
Determine Variable Expenses
After you calculate the difference between your income and expenses, it's time to look closely at the variable expenses category. Essentially, you're performing a financial self-audit. Which expenses can be trimmed? Dining out and entertainment are the two main expenditures that tend get out of hand the most. After all, you have to eat to survive. And what's life without a little entertainment? But if you could cut your variable expenses and funnel that cash somewhere that will help you earn more of it (and you can), then curbing the instant gratification mindset will pay off down the road with a better credit score and savings put aside.
Reduce Essential Fixed Costs
When you've completed the analysis of the variable expenses and decided which are the least essential, move to the essential fixed costs. Can you cut costs by refinancing any loans you may have (including student loan refinancing) and receive a lower interest rate? What are you including under utilities? Though it's pretty much sacrilege to not have a cell phone in the Digital Age, can you cut that cost by lowering the data usage maximum or switching from an unlimited plan to a less costly alternative? Reducing your debt can also improve a bad credit score, so that's an added bonus.
Following the 50/30/20 rule is a good idea when working to be financially secure. This can be revised down the road depending on other factors such as a change in income, expenses or a shift in your financial objectives (e.g. paying off student loans, purchasing a home, building equity, etc.).
Practice Good Saving Habits
Savings accounts have a lower rate of return in terms of interest when compared to the other financial products on the market, and sometimes savings can lose value if not handled right. But unless you're prepared to jump into creating an investment portfolio, setting aside a certain percentage of your paycheck and placing it in a savings account is the quickest way to earn interest and is a great precursor to planning for retirement. The general rule of thumb is that somewhere between 10% and 20% of your income should be shuttled over into savings. You should also make sure that you target different investment types so all your money isn't in one place.
It's difficult to predict when you'll need emergency funds, and this is where having a savings account can save you. Almost fifty percent of Americans don't have an extra $400 available to pay for even a small emergency expense, which can lead to tremendous financial stress even if an individual has other savings accounts like a retirement plan in place.
Meanwhile, the recommended savings amount is between 3 and 6 months' salary, which will provide a buffer should your primary income source—your job—disappear.
By practicing good saving habits, squirreling away a fixed percentage of your income each week or month, and following a budget that balances essentials with some non-essential lifestyle expenses, you'll be in an excellent financial position should an emergency arise.
Personal Finance Tools
Given that there is now an app or other software tool for just about everything, tax preparation strategies, personal finance, investing, and saving for retirement on a budget is literally at your fingertips. In addition to the old standby, Excel, there are several others on the market that help to create budgets in minutes, including:
These personal finance tools can elevate your budgeting ability from beginner skills to advanced budgeting skills and put you on the track for maximizing what credit can do for you and developing advanced investing skills.
Budgeting doesn't have to be a complicated issue, but it may take some ruthless self-evaluation depending on your current financial situation in relation to future financial objectives. Someone looking to pay down debt has very different goals than someone who wants to start investing, or someone who is saving up to make a large purchase.
Budgeting is the first step to getting ahead financially in life, so begin planning your budget today to set yourself up for a better tomorrow.