Most people don’t put too much effort into tracking their expenditure. Instead, they simply spend when the need arises. If they run short of cash, they wait for the next paycheck, or if the requirement is urgent, they use their credit cards. While this approach could work for some time, it is not the best way to manage your personal finances.
What if you suddenly need some money? Your car may break down or there may be a medical emergency in the family. Where will you get the funds to meet these expenses?
According to CNN-Money, a consumer financial services company based in New York City, six in ten Americans do not have enough savings to pay for a $500 or $1,000 unplanned expense. A little planning and foresight can prevent you from falling into this trap.
All that you need to do is prepare a budget. Simply list down your income and expenditure for the last month to understand where your money is going. Then make a spending plan for the following month.
Although that sounds simple, you may have some difficulty in remembering the details of your expenditure. But you can overcome this problem by keeping track of your expenditure over the next 30 days.
After you do this, you will be in a better position to plan your expenses for the subsequent months.
Here are some guidelines to follow when you make your budget:
1. Try the 50-20-30 Rule
Many people don’t know where to start when they make a budget for the first time. If you fall into this category, consider using the 50-20-30 rule. This rule offers a guideline on how to allocate your monthly income. It says:
- Spend 50% of your paycheck on essentials like rent, groceries, and utilities.
- Keep 20% aside to meet your financial goals. You could use this money to pay your credit card balance or you could invest it.
- The remaining 30% could be used for discretionary expenditure. Eating out and holidays would fall into this category.
2. It’s Important to Plan Ahead
When you plan your finances, you should remember your mid- and long-term goals as well. Don’t restrict your budget only to the next month’s expenditure.
An example of a mid-term goal is your yearly family vacation. It’s a good idea to set some money aside every month towards this. If you don’t, you may have to resort to borrowing on your credit card, which is an expensive option.
Similarly, do you need to save for your child’s college education? Another long-term financial goal for most people is to set aside enough funds for their retirement.
3. Maintain an Emergency Fund
Every individual should set aside some money to meet unexpected expenses. Although this cash could be used to meet any sudden requirement, one of the primary purposes of an emergency fund is to provide you with enough money in case you lose your job.
How much should you have in your emergency fund? Three to six months of living expenses is generally considered adequate, although it is better to aim for more. Remember not to use this fund unless it is a real emergency.
4. Get your Family Involved
Take your spouse into confidence when you are making your budget. In fact, you may even want to involve your children if they are old enough. Discuss your plans and be prepared to make changes if required.
It will be much easier to implement your budget if everyone in the family is on the same page.
5. Your Budget Should be Flexible
Your budget is not an all-or-nothing exercise. Many individuals get discouraged if they cannot meet the goals that they have set for themselves. You may want to save, say, 20% of your income. But there may be a month when you save only 10% or even less than that.
Don’t get disheartened if this happens. Try and make up next month. Even if you don’t meet your budget for several months in a row, it should not be a reason to give up altogether.
Mistakes to avoid
How can you ensure that you stay with the budget that you have set for yourself? One precaution you could take is to avoid buying on impulse. Of course, this applies only to high-value purchases.
If you see an expensive phone and decide to buy it on the spot, you could resist the temptation. Defer your decision for a week or ten days. You may realize that your existing phone works perfectly well.
Finally, don’t make the mistake of watching every dollar that you spend. This will only serve to make you feel unhappy and constantly remind you that you are on a budget.
Resources:
1. https://money.cnn.com/2017/01/12/pf/americans-lack-of-savings/index.html
2. https://www.thebalance.com/simple-budgeting-guidelines-453609
3. https://www.mymoneycoach.ca/cgi/page.cgi/2/article.html/Budgeting_Tips/_7_Steps_to_a_Budget_Made_Easy_
4. https://www.payoff.com/life/money/5-simple-steps-to-create-a-successful-budget/
5. https://www.everydollar.com/blog/steps-to-help-you-stick-to-your-budget
