Here are some facts from The Federal Reserve (also featured in our Emergency Fund article):
Budgeting can help with all of the problems above. What is a budget? A budget is the amount of money you have coming in, and the amount of money you have going out. Simple, right? However, it is extremely easy to forget about the importance of budgeting and put it on the back-burner. Following a simple budget can surprise you. Budgeting can really open up your eyes to how much money you are wasting on unnecessary or frivolous expenses. We get it. We all want to enjoy life and buy whatever we want, whenever we want, but we need to be responsible. We have to enjoy life within our means and budgeting can help us stay out of debt and have fun with our money.
So, how do you budget successfully?
1) List your sources of income.
If you are a young person, most likely your income is only coming from your job. If you are older and more settled, you may have other sources of income such as property, investments, and businesses. To budget properly, do not, unless absolutely necessary, spend more than you earn on a regular basis. If you have no way of reducing your expenses, then you need to find a way to increase your income. Switching jobs, getting a promotion, or even getting an additional job are some solutions that you can try. Do not live above your means. This is what gets people in trouble! Once you know how much money is coming in, then go to the second step.
2) List your expenses.
The more detailed your expense list, the better. That way you can account for everything you need to pay for. It is best to group your expenses. Expenses typically come in following categories:
Add the subcategories “Necessary” and “Extra” under each category.
How much do you have left over after everything?
After listing your expenses, figure out where you can cut back. Do you really need a house or apartment that big? Are you utilizing all of your monthly memberships, or can you cut something out. Maybe you don’t need the newest BMW or Mercedes. Look for cheaper alternatives for some of your expenses. Are you overpaying for your phone bill? Are you going out too much? Just being aware of how much you spend can help you spend less. NoDegree highly recommends that you use an app to keep track of your expenses. The Mint app is great. YNAB (You Need a Budget) is another great one. There are many budgeting apps to choose from; browse around to find one that works best for you. A lot of credit cards generate reports so you can see where your money is going. Whatever you do, you have to track your expenses. It is extremely easy to get carried away with your spending if you aren’t paying attention.
There will be times when you will have expenses that aren’t a regular part of your budget. Your car breaks down. You or a family member gets sick. Something breaks and you need to replace it. If you are saving money, then this will not be a big deal. However, if you didn’t budget, this would make everything much more stressful! This is what an Emergency Fund is for. $400 for something urgent when you are regularly saving money is easy to manage.
3. Save money for FUN!
When you budget, make sure you set money aside for fun. Fun is necessary, but moderation is important. This way you can treat yourself without going overboard. Go out and go shopping. Hang out with your friends. Buy that new video game you been waiting for. Just don’t go shopping every day or buy every game on the shelf. The key is Moderation.
4. Shop around when you can.
For your necessary expenses, shop around when you can. You probably can’t leave in the middle of your lease, but you can switch your phone and internet providers. Sometimes, you can save $50 a month ($600 a year) by switching companies. Shopping around can easily save you hundreds of dollars a month (thousands a year). One good way to think about decreasing expenses is that saving $84 on a monthly basis will leave you with over $1,000 saved for the year. Who couldn’t use an extra thousand or two? This can easily be done by packing lunch a few times a month instead of eating out. Or, maybe you’ll decide to stay in more often.
5. Start small.
When budgeting, we suggest you start small. Trying to cut back on all of your expenses at once can be mentally frustrating. Focus on one area at a time. Shop around for one bill this month. Next month you can focus on another bill. We recommend you start with the biggest expenses first. Budgeting will get easier as you get used to it. Think about it this way: When you first start working out, you don’t run 10 miles on the first day, you build up to it. When you budget, you have to think of it like a workout plan. Start small and work your way up. Eventually you get to a point where you can budget in your sleep!
There you have it. Budget today! It doesn’t matter how much you make. Everybody needs to budget. Millionaires go broke when they don’t watch their expenses. Think about what you are spending. Start small and work your way up. Budget so that you can enjoy life and enjoy the things that are important to you. Before you know it, your dream house will actually fit within your budget!