Are you feeling gloom and doom because you’re broke? Maybe you are one of the many who is yet to figure out how they should manage their finances. Managing your personal finances is as important as maintaining your physical and mental health. Keeping your finances sane is probably one of the most important accomplishments you can achieve since every aspect of your life will depend on it. Taking control of it can also help you determine your short-term and long-term goals and create a balanced plan to achieve those goals. Thus, you should make wise decisions about spending and saving. And one way to effectively do that is by creating a reasonable and realistic personal budget. Having this budget is one key to success since this is actually a tool that will give you the most control of your financial future.
So take time to focus on your budget now and defeat money-depression. This article will help you.
Table of Contents
Understand your goal
The first thing you should do is to define and understand your goals. What exactly do you want to do with your life and with your money? this is important because finances can greatly affect many areas of your life. For example, your goal to travel the world affects how you plan your finances and your goal to retire early is entirely dependent on how well you handle your finances now. And budgeting makes it easier for you to create both short-term and long-term goals and track your progress towards achieving them. Some ways to realize this include building up some cash reserves in case of emergencies, paying off high-interest debts while avoiding useless debts, saving for fun things, and regularly revisiting you short- and long-term goals.
Create your personal weekly spending budget
Creating a weekly budget is a great way to easily monitor what’s left for you to use without dipping into your monthly bill money. Though this may mean creating limits for yourself, this helps you avoid spending more than you can afford.
The first step to maintain a personal weekly budget is to determine where you spend your money and if you actually have a fund to spend for those. Make a list of how you spend your money for one week then write down the amount of money you usually spend on every item you listed. It is also important to determine how much money you actually have to spend each week. You may also need to calculate the difference between the money you are spending and the money you have to spend. After determining this, you may see a need to cut down or cut completely some unnecessary expenses that you make.
Staying within a budget really takes practice but if you patiently stick with it, you will then find that it becomes easier. Just be honest and be realistic when making your budget.
Learn to use 5-Category Budget
The goal of budgeting is not tracking every penny you spend on something like you intricately enlist all of them. For example, tracking how much you are spending on gasoline is interesting but there’s no point in tracking this if it doesn’t change your behavior. Instead, you want to have a budget or a spending plan that represents the whole picture of your expenses. An effective way to achieve this is learning to use the 5-category budget. This is done by simply tracking your spending then assigning each to five categories. This is very easy to implement and can have a significant effect on your finances. Here’s an example:
Category 1. Housing
Expenses under this category include mortgage or rent, home repairs, and maintenance, property taxes, utilities like electricity and water. And this usually comprises 35% of your income.
Category 2. Transportation
This includes gasoline, car insurance, all the repairs and maintenance, the amount you pay for parking and other public transportation rides. Note that this should not take up more than 15% of your budget.
Category 3. Other Living Expenses
This category usually takes up 25% of your income. This includes restaurant bills, concert tickets, shopping new clothes, taking on a nice vacation and alike.
Category 4. Savings
10% of your budget should be allotted for savings for your retirement or for an emergency fund.
Category 5. Paying off debt
This includes your credit cards or student loans. And it may consume 15% of your income.
Save money first and spend the rest
The primary goal of budgeting is to spend less more than your income. And one of the best ways to do this is to save first. You do the opposite, rather than saving what is left by the end of the month, save first and spend the rest. Convince yourself that this savings goal is just another important bill just like your home mortgage or rent that must be paid every month.
Practice the 50/20/30 rule
The 50/20/30 plan is a proportional rule that can help you keep your spending in accordance with your savings goals. Just look at your income in three groups: 50% for your needs, 30% for your wants, and 20% for your savings. Your essential expenses are those you would almost certainly have to pay for food, housing, transportation costs and utility bills. Your “wants” include your personal lifestyle expenses like your cell phone plan, cable bill, trips to the coffee shops, restaurants, etc. Only you can decide which of your expenses can be designated as “personal.” And the last portion which has the weight of 20% is for your savings – your “get ahead” category. Indeed, this rule will help you start sorting out the complicated world of personal finance.
Choose the right tools
Choosing the right budgeting can make your financial management job a lot easier. It can make your work more effective, efficient, and even enjoyable. And there are many budgeting tools available for you to choose from. Some of these are free and may even offer some surprises for you to further realize your financial goals. Examples are YNAB, Personal Capital, Quicken, Mint, and Spreadsheet.
This is a guest post by Aisha Workman, a financial solutions adviser. She helps clients find where to borrow money in Singapore, how to manage their expenses, and other financial services like insurance, retirement fund, and more.