When it comes to financial success, one of the most important steps to take is setting up a monthly budget. For many people, the word budget is a dirty word. Most people see budgets as restricting. For this reason, some personal finance gurus recommend the term spending plan over budget. No matter what you decide to call it, a budget or spending plan is necessary for most people to achieve long-term financial success. Your budget is specific to your life, and it should be tailored to your personal level of income and expense.
Match Income and Expenses
The first thing you’ll want to do when trying to set up a great budget is to look at where your income and expenses are on a monthly basis. If you have $3,000 per month in after-tax income and only $2,900 in expenses, you have some wiggle room. On the other hand, if you have $3,100 in expenses, you’ll have to either find a way to increase your income or pare back your spending. It’s a good idea to set up a spreadsheet with line items that give you a visual accounting of your monthly money situation.
Look to Cut Expenses
Regardless of how much you make, it’s always a good idea to cut your expenses as much as you reasonably can. If you’re married and never plan on having kids and you have a McMansion that’s 3,000 square feet, downsizing and saving the difference can make sense. On the other hand, if you’re looking to have five kids, you might want all of that space in the future. Depending on your financial situation, you might need to keep a deductible of $250 on your car insurance. If you have a nice level of savings, you might be able to raise the deductible to $1,000 and save a nice chunk of change each month. Looking at your expenses and finding where you might be able to cut back is key to providing the gap between your income and expenses that’s necessary to build wealth over time.
Think About the Long Term
Short-term thinking will kill your budget, and it will kill your ability to build wealth. You might want to fly down to the Cayman Islands for a week. If you have a nice emergency fund and you’ve saved up for this trip, go for it. On the other hand, making such a major expense on a whim is the type of short-term thinking that will lead to long-term financial stress.
Build an Emergency Fund
At a minimum, your first goal should be to stash away about $1,000 to take care of small emergencies that might pop up. Over time, you’ll want to build up anywhere between three and 12 months of expenses to take care of any bouts of unemployment you might encounter. If you’ve not been able to build up an emergency savings account and you have no credit cards available to take care of an unexpected emergency, taking out a payday advance online might be an option to get you through the situation. Of course, you’ll want to pay off the debt as soon as possible to avoid extra interest costs, as every dollar of interest you avoid is a dollar that can go toward other goals. To build out your emergency fund, you might take advantage of a major windfall like a tax return. You might also put the savings into your budget and automatically transfer the funds each month. Whether it’s $100 or $500, you’ll be glad that you have the savings.
Prioritize Paying Debt
If you have debt, a vacation is not a great idea. Likewise, a new car is not a good purchase if you have outstanding debt you need to pay off. In your budget, you’ll want to prioritize paying off your debt. Try to use any extra money that’s available after meeting your minimal obligations to accelerate your debt payoff. You can pay as much as you can to the smallest debt, or you can strive to pay off the debt with the highest interest rate. Just make sure that you work to pay off your debt as soon as possible so that less of your income is going toward interest payments.
Save for Retirement Automatically
If you have a retirement plan available through your employer, be sure to take advantage of it. Even if you can only save 1% of your income each month, make sure to do so. Chances are that you’ll be able to increase the amount periodically. Over time, even small amounts can add up to a healthy nest egg. If you don’t have a workplace retirement plan, it’s still a good idea to put money toward an investment account each month. By automatically siphoning some money out of your budget each month, you won’t be tempted to spend it, and you’ll wind up with a healthy chunk of change in a few years.
When making out your budget, make sure that you think about the long term. This will involve setting up a savings account for emergencies. It should also prioritize paying off your debts to cut down on the amount you spend on interest. You’ll also want to send money toward a retirement fund automatically so that you don’t spend the money. By making sure that your monthly budget has some wiggle room, you can build wealth that will really start to snowball.