People from all walks of life who set financial goals – and reach them – generally have one thing in common: a budget.
According to this recent study, people are budgeting more than ever before. Budgeting is a practical way to stay in charge of your money – even when life gets unpredictable. Having a budget means knowing exactly how much is coming in and going out each month and planning where and when to spend. Plus, budgeting is essential if you want to pay off debt.
Regardless of what motivates you to budget, BBB has tips and tools to help you get on the right track to a better financial future.
- Calculate your income. The first step to creating a budget is to calculate your monthly net income, after taxes, so you know how much you are bringing home.
- Track your spending. Whether you prefer an app on your phone, computer software, or simply a notebook to jot down your expenses, keeping track of your spending is critical. It helps you see where you are actually spending your money, rather than where you think you are. Use this budget worksheet from the Federal Trade Commission to calculate your income and expenses.
- Categorize your spending. Create categories based on necessities (housing, utilities, food, transportation) and luxuries (entertainment, dining out, travel). If you have credit card balances, student loans, car payments or other debt, make “debt reduction” one of your categories.
- Set up a budget. Once you have an idea where you are spending money, you can set up a realistic budget. Many experts recommend following the 50/30/20 rule. Allow 50% of your income for your needs, 30% for wants, and use 20% to pay down debt or save. heck out this online budget planner from the Financial Consumer Agency of Canada.
- Choose a budgeting system. Think about your financial goals and personality and select a budgeting system that works best for you. For example, a cash-based system can help curb over-spending. A zero-based budget, where you account for every dollar you earn each month, is great for people who love to plan.
- Pay down debt. If you have credit card or other debts, be sure to include repayment in your budget. One method is to pay off the credit account or loan with the highest interest rate first (the “ladder method”). Another is to pay off the smallest balance first, so you feel a greater sense of accomplishment (the “snowball method”). Use whichever method works best for you. The important thing is to start chipping away at your debt. Also, call your credit card company and ask if they will lower your interest rate. Some lenders will agree just to keep you from transferring your debt to another lender with better terms. If you shave even a few percentage points off your rate, it can save you thousands and help pay down your balances faster. Visit the National Foundation for Credit Counseling for help and advice on getting out of debt.
- Pay bills on time.Consider online bill-paying that eliminates writing checks, buying stamps, etc. Automatic payments can be scheduled ahead of time and can help you avoid late fees and penalties for missed payments.
- Contribute to your retirement. Make sure you are contributing enough to your 401k plan to get the full matching contribution from your employer. If you get a raise at your job, try to put that extra money aside into your retirement account. You were able to survive on that income for this long, so you won’t miss that extra cash and your retirement account will greatly benefit.
- Save for the big things. Big purchases, such as vacations or holiday gifts for the whole family, can easily blow your budget. Avoid going into debt for these expenditures by saving up ahead of time and only spending what you were able to save. Many banks and credit unions offer savings clubs that might help.
- Build an emergency fund. Emergencies – car or home repair, unexpected medical expenses, or job loss – can easily throw you off track when it comes to budgeting. Financial experts suggest setting aside an emergency fund of six months’ living expenses. If that seems too ambitious, start smaller. Having an emergency fund of even $500 is enough to get you out of many financial scrapes.
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