Do you feel like you’re always living paycheck to paycheck? Is your money spreading thin? Here are some tools you should employ for your financial budget. Are you running out of money before your monthly bills are paid? Or just scraping buy? Are you ready to take charge of your finances? Want to make today the first day of the rest of your financial life?
A budget is one possible tool that could get you out of that bind. Strictly speaking, a detailed line item budget isn’t necessary. You don’t need to track or care about how much money you’re spending on restaurants versus clothes, particularly if you’re already debt-free and saving a significant portion of every payday.
Make a Permanent Decision to Take Charge
If you said yes to any of the questions above, congratulate yourself. Seriously, many folks find it easier to avoid dealing with this stuff. Education is a critical tool. Being proactive will give you a much better chance at future happiness than being reactive.
Now that you have made this important decision, here is how to make your financial budget successful.
Outline Your Financial Budget
The word “budget” unfortunately sounds unpleasant. It sounds like “restriction” or “buzz kill.”
If the words “financial budget” seem scary, think of it as a “spending plan” instead. You decide how much money to spend and in what category, depending on your priorities. Then you get to spend as much as you want to in certain categories, depending on what you decided.
The categories you will mainly need are:
- Housing
- Food
- Transportation
- Clothing
- Entertainment
- Savings
Housing includes your rent, mortgage, real estate taxes if they apply, insurance…anything associated with keeping a roof over your head. It would also include what you spend for heat, air-conditioning, water, etc.
Track Your Actual Spending to Create a Realistic Financial Budget
Coming up with a financial budget involves trial and error. It’s one thing to aspire to spend $100/month. But it’s not going to happen if you think you spend $75 when you actually spend $200.
Spend at least a full month writing down everything you spend money on. Whether it was a $1 candy bar purchase, a $50 ticket to a ball game or an $800 unexpected expense that hopefully, you were able to use your emergency cash fund to pay, write it down.
There is power in the pen. Writing down what you purchase can be a powerful tool (as old-fashioned as it may sound). For under a dollar, you can purchase a small notebook that is reserved for this purpose. You will also need to incorporate any debt repayment into your budget instead of hoping it will somehow get paid otherwise.
Decide How to Incorporate Debt Obligations Into Your Financial Budget
How much debt do you have? Are there some debts that you are delinquent on? Are there any you are in default on? Your first step in dealing with debt might be to contact creditors to negotiate a monthly payment amount. Debts that get ignored tend to snowball into much larger financial problems. You will need to have a strategy for dealing with unsecured debt. “Unsecured” means any debt that is not attached to a tangible item that can be repossessed if you don’t pay.
Once you have listed and totalled your debts, use a debt calculator to give you an idea of how long it will take you to be free from unsecured debt if you continue making minimum monthly payments. Include at least the minimum monthly payment on all unsecured accounts in your financial budget. Then add as much extra as you can to pay on the smallest debt. Once the smallest debt is paid off apply that bill’s payment to the next smallest debt. From this point forward it is important to borrow responsibly.
Execute Your Financial Budget
You have tracked, analyzed and planned. Here is where the rubber meets the road. You will need to have a system for maintaining your financial budget. There are multiple ways of doing this and the best one is the one that you will use.
One way is to maintain multiple bank accounts with different names for different purposes. A main “operating” account acts as a clearinghouse into which you would deposit all earnings. You then automatically transfer whatever percentage or fixed amount of your earnings into the accounts designated for a particular purpose. This is especially useful when making sure you have or are maintaining the emergency cash account.
You can also install a smartphone app that enables you to set up your financial budget and savings goals, as well as connecting to your bank accounts. Choose an app that lets you know what you can spend each month, week and day based on your goals. You will always want to know how much you have left to spend to stay on track and be alerted when you are off-track.
Consider Ways of Pocketing Some Extra Money
With all of this spending and debt talk, we can’t overlook the issue of income. In some cases, you can slash spending, but it is not going to help the financial budget if there is simply not enough income. Consider whether you could ask your employer for a raise (after documenting some achievements you have made since your last). Is there a class you could take to become certified in a new skill that would entitle you to a pay raise? Is there a hobby you enjoy that you could convert into a money-making venture? There is definitely more to life than work. But perhaps if you are in a particularly tight bind you could pick up a temporary part-time job.
Don’t Let Money Stress You Out
Having a financial budget should be empowering and not limiting. Your financial budget should serve you, and not the other way around. Having negative feelings around money does not serve your financial well-being. Respect money, appreciate it, and don’t let it see you sweat. If you find that you have chronic problems with debt and keeping money in your pocket, it may be time to seek help from a counselor about what negative programming you are holding about money.
Practice the 50/20/30 rule
Basically, the 50/20/30 rule tells you what percentage of income goes into what pile: necessary expenses, savings, and personal expenses.
Necessary expenses: 50%
50% of your income goes to the necessary expenses pile. When we say necessary expenses, we mean the minimum living expenses needed to survive. Which are food, shelter, utilities, transportation, and health insurance.
Savings: 20%
You’ll then want to put 20% of your income to your savings pile. This pile isn’t strictly for retirement; it includes paying off outstanding debt as well as money for your emergency fund. When it comes to emergency funds, ideally aim for three to six months of your necessary living expenses. That way, should you get let go or need to quit your job to take care of a sick parent, or any other emergency, you’ll have a financial cushion during that time.
Personal expenses: 30%
And lastly, 30% of your incomes goes to your personal expenses. This includes cell phone bill, cable TV, gym membership, concert tickets, restaurants, you name it.
Pretty much, anything that increases the quality of your life. However, should you find yourself in a financial predicament, this is the first pile to cut. (Your necessary expenses is the last. In which case, we’d assume you’re living with a relative or friend.)
If you find luck just isn’t on your side when it comes to money, Cigno may be able to lend a hand. Try our loan calculator to decide whether or not the Cigno service is right for you.
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Disclaimer: Please be aware that Cigno Loans’ articles do not replace advice from an accountant or financial advisor. All information provided is intended to be used as a guide only, as it does not take into account your personal financial situation or needs. If you require assistance, it is recommended that you consult a licensed financial or tax advisor.