It’s easy to unintentionally avoid a budget when scraping pennies together isn’t necessarily part of your lifestyle anymore. Maybe you really don’t know that you’re putting off budgeting, but at the same time would you be shocked to know that you could be saving hundreds more for emergencies, large purchases, or even retirement? By avoiding a budget, you might be missing out on some serious savings you didn’t even know you were capable of.
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Why Do I Need a Budget?
We all know that saving is important and many of us are planning for the future through a 401(k) or other retirement fund. In addition, most financially stable adults are also pumping money into a savings account for large purchases and emergencies. So, what else is there to worry about? Well, if you haven’t sat down in a while to examine exactly where your money is going, you’re not truly in control of your financial future. You’re indirectly letting heaps of savings escape you.
How Do I Start a Budget?
Budgeting isn’t something that many people look forward to doing. However, it’s essential to your financial well-being. You’ll never know where your money is going if you don’t sit down and look. If you can make the time to sit down and take and in-depth look at your finances, it’ll make tweaking your budget much easier for you down the line.
The first thing that I suggest you do is take a look at all of your income. Whatever sources you’re pulling in money from each month should be recorded. If your income isn’t on a strict salary, I would take an average from the last three months and use that. Once you have that total you can start taking a deeper look at your monthly expenses.
Your monthly expenses are likely to vary month to month when you’re not watching your finances closely. However, you should at least be able to see a pattern or common category in each of your charges. Take a look at your bank statement and go over your charges for the last three months. Overlapping charges (like monthly bills) should only be recorded once, since you know what those will look like month over month. Start grouping similar individual charges together and listing the prices you paid. You’ll essentially want to make categories that each of these charges fit into. After you’ve categorized all of your charges for the last three months, you can start to make decisions about which charges are essential and which are not.
What Does a Healthy Budget Look Like?
A healthy budget looks a little bit different for everyone. So, I would encourage you to examine your unique circumstances and not try to follow someone else’s rules for where your money should be spent. You can decide what’s important to you and not anyone else. With that being said, there are a few very important and common areas that most financially healthy individuals prefer to contribute to: retirement, savings, and an emergency fund.
Let’s start with retirement. Lots of people start a 401(k) in their 20s and it’s easy just put it out of your mind and assume you’re doing the right thing. Yet, I believe that everyone should do a quick check up on their retirement fund every year. The closer you get to retirement, the more necessary it may be to start upping your contributions. There’s never a bad time to max out your allowed contributions and employer matching. If you have the financial means, you’ll really be getting the most of our your 401(k).
If you’re getting closer to retirement and you’re not completely comfortable with the status of your account, it’s probably time to start another account. You can look into your own personal retirement account outside of your employee contributions. There are numerous different types of accounts for all sorts of needs. I highly suggest that you meet with some sort of financial advisor, or do your own very thorough research, to go over all of the differences. Although, you might not quite be at this stage yet. The important thing is that you start saving now, through retirement accounts and/or your personal savings accounts.
Savings accounts are imperative for anyone who has personal income. Life is unpredictable and things happen. You might have heard people say that you should have at least three months pay stored away in your savings account and that’s not a bad idea. Although, I don’t label it as a “layoff” fund. I’d prefer for you to be able to responsibly use it as you see fit. A good rule of thumb is to start saving a chunk of every paycheck. Personally, I like to do about ten percent, but more or less is perfectly fine. Then, once you have a good chunk of savings, you’ll be able to take out bits and pieces if you’d like to use it for various purchases (not everyday type purchases).
It’s also a great idea to have a goal in mind. Saving a few dollars every paycheck is great and it will build up a healthy savings eventually. However, most of us want to save for a reason. If you want to afford a vacation each year or to save up for a new car or even to purchase a house, you might be inclined to save a little bit more with that clear goal in mind.
An emergency fund is a little different. This is a smaller fund that is good to lean on when something bad happens. This way, you don’t have to take away from your goal fund and ruin your progress. Take a smaller percentage of your monthly income and stash it away in another place (preferably another savings account). Now, when your car breaks down, your house needs repairs, or your pets get sick, you can dip into this smaller fund to take care of it.
If you’re making contributions to these three essential areas, you’re probably doing pretty well. As long as you’ve got a good savings, retirement, and emergency fund, you’ll be able to dictate where you need the rest of your income to go.
What If My Needs Change?
This is what I was talking about a little earlier. If you already have your finances in order, you will know exactly where your money is going every month. As such, you’ll be able to adjust some “non-essential” spending over to where you really need it now. This time, it won’t be nearly as tedious of a process, because you don’t have to re-examine each and every charge. It should be fairly easy, right off the top of your head, to know “I can cancel these luxuries for a few months and put money where I really need it”.
Budgeting and saving isn’t always easy, but it is incredibly rewarding once you get the hang of it. The whole point of a budget is to get it to work for you. You can decide where you need your money most and work towards that goal. When you’re all set for retirement, on that trip to Hawaii, riding in your new car, or unlocking the door to your new house, you’ll be happy that stuck with it.
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