Managing your money is a personal skill that benefits you throughout your life – and not one that everybody learns. With money coming in and going out, with due dates and finance charges and fees attached to invoices and bills, and with the overall responsibility of making the right decisions about major purchases and investments consistently – it’s daunting.
One of the first building blocks of a successful personal finance plan is the ability to budget. Although it’s easy to understand, it’s also difficult to do because it requires a hard look in the mirror and a willingness to see what really stares back at you.
Budgeting requires that you analyze and, likely, change your spending habits. Instead of your money controlling you, you control your money.
Develop habits to save, avoid financial crisis and maintain peace of mind.
How do you get started, budgeting? Simple: you plunge right in. You need to see exactly how you’re spending your money and identify where your financial holes are.
In a notebook or a mobile app, write in every time you spend money.
Be diligent about this, because it’s easy to forget. This is the foundation for your budget.
Identify fixed and variable expenses
Fixed expenses are ones that you have every month: rent, loan repayments, car payment, electric, bill, water bill, student loan payment. Variable expenses are costs that go up and down each month and ones that come and go – groceries, haircuts, data bundles, etc.
After three months, calculate how much you are spending, on average, per month. And look at the categories.
This is where most people tend to overspend. Decide what gives you the most pleasure from these monthly expenses that you feel these costs are worthwhile? And which ones can you really do without? Be honest, and start cutting. This is the beginning of the hard decisions.
• How to follow a monthly spending plan
• Ways for lowering your monthly bills
• How to handle accrued debt.
• How to distinguish between short-term, medium, and long-term goals
• A breakdown of family needs
• How to meet your monthly loan installment repayments.
Factor in savings
A key part of budgeting is that you should always pay yourself first.
That is, you should take a portion of every paycheck and put it into savings. This one practice, if you can make it a habit, will pay dividends (literally in many cases) throughout your life.
Now set your budget
Start making the necessary cuts in your fixed and variable expenses.
Decide what you want to save every week or every two weeks. The leftover money is how much you have to live on.
Effective budgeting demands that you are honest with yourself and put together a plan that you can actually follow. The more time and effort you put into your budget today, the better you will be able to maintain a life-long savings habit.
Your financial goals are the specific monetary amounts you are committed to obtaining that will allow you to realize your vision for your life. As with any goal, financial goals should be aligned with your long-term plans, whether these plans include putting children through school, maintaining a particular retirement, or paying off and staying out of debt.
Good financial goals are detailed.
First, the goal is ambiguous. What is your current credit history? How high can you realistically expect to raise your score in a set time frame?
Even if you wrote down this goal and reviewed it every day, you would likely struggle to figure out where to start, and you wouldn’t know when you’d achieved it.
This is why you need SMART financial goals.
SMART goals are defined by the following characteristics:
Your Financial Goals and Your Budget Go Hand-in-Hand
• Specific
• Measurable
• Attainable
• Relevant
• Time-bound
Creating a realistic budget and sticking to it is a worthy financial goal in itself. Without a budget, you will find it hard in your efforts to meet your goals.
Money management and financial planning rely on solid budgeting skills.
Your financial goals are a component of your overall financial plan, and your budget allows you to review your plan and adjust as needed to reach your goals.
Just like professional athletes keep detailed records of their workouts and successes to gain perspective and track their progress, you can use your budget to review your financial achievements and setbacks and identify any areas of your plan that may need to be adjusted.
Your budget will also give you a feeling of control over your financial situation and the confidence to persevere in the face of financial adversity.
Another often overlooked benefit of a budget is its usefulness as a communication tool. Perhaps you and your spouse are not seeing eye-to-eye spending habits. Or maybe your kids think money grows on trees, as the saying goes.
The ability to present quantifiable proof of the family’s spending habits and how they are undermining everyone’s goals can support your argument for needing to cut back on take-out or putting a certain amount of money in the college fund every month.
