With an income of, say, $3,000 a month, how can I afford housing, food, insurance and fun without worrying about running out of money? For many, it’s a lot to cover, and no matter how much we earn, it seems we always struggle to make ends meet.
The simple solution? A budget. Despite its bad rap, budgeting represents more financial freedom and much less stress. A plan can be crucial to understanding and managing where your paycheck is spent. Whether you’re new to financial planning or have previously struggled with it, these 10 budget crunching tips can help you get started.
1. Be Conservative.
Start by identifying your income potential and comparing that to your lifestyle. Often, this will be what inspires you to create a budget. You may be in debt, looking for ways to reduce your expenses, or you may simply want to spend less money.
“You want to live within your means,” says David Szablowski, owner of Dave the Tax Man in Sinking Spring, who has spent the last 25 years managing school budgets across Berks County and 40-plus years managing personal budgets for clientele.
Ultimately, your expenses may come in way over your budget, and with the interest that comes with credit card debt, you could be facing major setbacks.
2. Prioritize Necessary Expenses & Goals
Everyone enjoys spoiling themselves a bit. However, it is important to recognize the difference between needs and wants, with much of your budget going to essentials.
“You want to take care of all of your necessary bills, taxes, utilities, rent or mortgage first,” says Szablowski. “Then, if there’s money left, attack any other debt you might have: your car loans, your credit cards.”
When your money is used to meet your goals, it's a source of pride. Next, you may want to start setting aside money for savings.
3. Be Disciplined.
“Obviously, if you’re not making a lot of money, you can’t take extravagant vacations and spend a lot on entertainment, so you have to have some self-discipline,” says Szablowski.
Once you’ve covered your necessities and have put aside money in savings, then you can start thinking about working towards your wants. They can add up, but they are often necessary for a sustainable budgeting plan.
4. Distinguish Between Fixed & Variable Expenses.
As you budget, you’ll find some expenses do not change from month to month, such as your mortgage or insurance costs. However, some costs are variable, changing monthly or weekly, like grocery and entertainment purchases. When you recognize these potential changes, you can better prepare your budget.
5. Take Advantage of Resources.
Currently, there are more resources available than ever for savvy spenders. For Szablowski, something as simple as a spreadsheet makes it easy for his clientele to visualize where money is being spent.
“There’s the top half, which is your revenue, and then the bottom half, which is all your expenditures,” says Szablowski. “With that, we can sort of give somebody the idea of how much money they are really spending.”
In addition to personal consultants like Szablowski, the Berks Community Action Program can also provide necessary resources, including budget counseling. Sometimes, it’s simply a matter of finding what help is available near you.
6. Prepare for Surprises.
Budgets aren’t meant to be perfect, so an emergency fund is crucial. “The old saying is pay yourself first, which means put some money away just in case something does come up, because there’s always going to be some kind of emergency,” says Szablowski.
When you avoid unnecessary spending, this emergency fund can add up quickly. So, whether it’s an unexpected car repair or a plumbing issue, you’ll always have money at hand to cover emergency expenses without incurring credit card or loan debt.
7. Monitor on a Weekly Basis.
Szablowski advises that you watch your paychecks and credit card balances on at least a weekly basis. This is especially important for those on a fixed income, allowing you to put money aside for savings as well as ensuring your credit card balances don’t sustain any excessive interest.
8. Plan to Revisit your Budget Monthly.
Expenses are bound to vary from month to month or can change with rate increases and the like. Even your monthly income could change. By revisiting your budget every month, you can quickly deal with such fluctuations. You may find it's time to set additional money aside for expenditures, or you may find an opportunity for further savings or even for treating yourself.
9. When it’s Time, Cut Up the Credit Cards.
Credit card interest can build up fast, so when you’ve finally paid off your balances, it’ll be a huge relief. However, you want to avoid falling into a charging pattern. When it’s time, cut up your cards and replace them with debit cards or even cash, providing your budget with something tangible that can be easily tracked.
10. Track your Progress.
Your first budget might not be successful, and your second and third may not be either. When you do succeed, though, you’ll be glad you kept at it. Track the differences in your savings and celebrate your goals while setting new ones.
If your spending habits don’t line up with your goals, it may be time to start over. Be real with yourself. Recognize where you may be able to cut expenses or even increase your income to reach your target.
Pennies add up.
“Would you rather have a hundred thousand dollars or a penny that doubled every day on a checkerboard?” asks Szablowski. “If you do that, one penny becomes two pennies and then two pennies become four pennies…that’s the compound interest,” he says. “You can turn that checkerboard into a couple million dollars.”
Whether you’re starting from the beginning or have been saving money for some time, now is the perfect time to start budgeting out your life. In a few years, your wallet will be thanking you as you reap the rewards of financial freedom.
