Anybody who has access to money should be taking serious steps to manage their finances on a daily basis. Money won’t last forever and building out a budget is the best way to ensure that you can make the purchases you need to make while also having money left over to build up a savings for a rainy day. Whether your goal is to eventually buy a house, or you are simply saving for retirement, focusing on building a budget can help you achieve your long-term financial goals.
Why is Budgeting for Finances Important?
As of the latest year, only 58% of Americans have more than $1,000 in their savings account and the average savings rate over a, roughly, 50 year period was just above 8%. At this level, the average person making $50,000 per year would only be saving $4,000 in that same period of time. That means that if they wanted to purchase an $800,000 home that required a 20% down payment of $160,000, they would need to save for 40 years.
However, if that same person decided to make a pointed effort to save 20% of their salary yearly, it would equate to $10,000 per year. At this rate, a person would only need to save for 16 years before they could afford that down payment on their own. In short, budgeting allows a person to save more money for the major purchases that may come up in life.
How to Build a Budget 101: Tips to Keep in Mind
Everybody should focus on building a budget, regardless of the amount of money you have at your disposal. After all, financial boundaries are a crucial aspect of effectively managing your finances no matter how old you are or how much money you have. Therefore, use the following five budgeting tips to create a plan you can follow:
Calculate your net income
First and foremost, to build out a budget you need to determine what your actual net income is. As opposed to gross income, this is the value you are left with after all taxes have been paid. If you have a spouse, combine your net incomes to get a total family net income figure.
Track your current spending levels
After calculating the net income of your family, you need to analyze your current spending habits. Look back through bank statements, credit card statements, and other forms of spending to see where the majority of your money is going to. Any big expenditures should be written down, along with the major categories your money tends to flow into.
Create sub-budgets within your primary budget
After tracking your expenses in certain categories, you will need to create smaller budgets within your larger budget. For example, a basic budget should start with two main categories: food and discretionary. This can be further customized later on depending on how a person spends their money. A person should set a spending limit for each of these categories that factors into the total budget limit.
Develop a savings plan
Next, a person must also consider how much money they want to be putting away into savings on a monthly and yearly basis. Nowadays, given high costs of living, a very common breakdown for expenses is the 50/30/20 method. This means that 50% of your net income goes towards rent, 30% goes towards general expenses, and 20% goes towards savings.
Adjust your spending constantly
Finally, a budget isn’t a one-time task that you sit down to complete and then never touch again. Budgets are meant to be adjusted constantly in order to account for new expense categories, changes in income, changes in life circumstances, and other similar factors. Always focus on updating your budget as needed.
How to Stick to the Budget You Build
Creating a budget is only half the battle. Many people often have no problem creating a budget, but actually sticking to what they created tends to be more difficult. To that end, below are five tips for sticking to a budget that anybody can use:
If you couldn’t afford something right now, don’t buy it with credit
As a general rule of thumb, if you can’t afford something out of pocket right then and there, you shouldn’t be buying it. Having a mentality of thinking you’ll be able to afford something in a week or two is a quick way to accumulate debt.
Follow a “budget to zero” strategy
This strategy refers to budgeting in such a way that your net income minus all expenses and savings is zero. By using this strategy, a person gives every dollar in their budget a purpose which reduces the likelihood of unnecessary spending when someone sees they have a little extra money in a month.
Turn a no-spend strategy into a game
Not spending money is difficult, so why not tap into your competitive side and turn it into a game. See how long you can actually go without spending money on things that are a necessity in your life. You may soon find that months have passed, and your game continues.
Use apps that identify the subscriptions you currently have
One major problem people have when it comes to sticking to a budget is remembering what they are spending money on. Over the years, it’s normal to sign up for a number of different subscriptions that you eventually forget about, but these cost money. Use free apps that can connect to your accounts and identify which subscriptions you have which may no longer be active.
Turn your finances around today
There is no reason for a person to settle for poorly managed finances. Take the time to study your spending habits so that you can make better choices when it comes to your money. Focusing on only spending on things you need, rather than those items you simply want, is only the tip of the iceberg for budgeting. Use all of the aforementioned tips to improve your financial health as soon as possible.