By | Craig Middleton
Managing your finances well sounds like a complicated task, but it doesn’t have to be. Whether you’re figuring out how to manage your money for the first time, working to get out of debt, or saving up for a large purchase like a house or a vacation, the first step is to get organized with a budget. While there are a wide variety of methods for keeping track of your budget, here are some principles that will help you establish yours.
Know How Much You Make
You can’t have a budget if you don’t know what your income is. You should start with calculating how much money you make every month after tax is taken out. Knowing this amount will allow you to take out percentages of your income to calculate what you can afford to spend for rent, bills, groceries, and gas. You shouldn’t set yourself up for a lifestyle that doesn’t match your current income. It is always better to be too cautious with your money than to go broke within a couple months because you weren’t cautious enough. Balancing what you should spend and save can be a tricky task to handle since it varies from person to person, but the following guidelines should be able to give everyone a solid foundation to start.
Don’t Spend More Than You Have
While there are exceptions to this rule, such as purchasing a house, it’s a good guideline to follow to make sure your money is under control. If you’re just starting your financial journey, it’s important to make sure you don’t tie yourself down with unnecessary debt, and if you already have some debt, it’s important to not dig yourself into a deeper hole. If you do have student loans or other debt to pay off, include those payments in your monthly budget, and put every extra dollar that you can toward paying off extra each month. If you are working to build or rebuild your credit score, you can also apply for a secured credit card. You’ll pay a deposit that will become your credit limit, and then you’ll treat it like a normal credit card. Banks are more willing to issue these because you’re providing your own collateral, and it will help you raise your credit score. When you use your credit card, keep in mind that you should only make a purchase if you can pay it off right away. There’s no need to buy those expensive clothes or new shoes if you don’t have the money for it.
Give Every Dollar a Job
When you sit down to organize your budget, make sure every dollar of your income has a job. You can do this by establishing specific categories for items such as clothing, home decor and groceries, or you can simply divide your money into broader categories like savings, wants and needs. Wherever you land on the spectrum, establishing where all of your money is going will help you cut down on unnecessary expenses and save for long-term goals. Don’t become too attached to your categories, though. Feel free to move money back and forth between them as you need to, as they’re simply a guide to help you manage your money, not a set of rigid rules that you can’t work around. Finding a way to track it all that is easy (and maybe even enjoyable) to use is vital to making sure you’ll actually stick to your budget, so make sure you keep trying different methods until you find the best one for you.
Budget Spending Money for Yourself
Sticking to a budget can be hard work and often means giving up items you want but can’t afford. To keep from becoming frustrated and going out on a spending spree to overcompensate, add a category for spending money to your budget, even if it’s as little as $10 a month. If you share a budget with your spouse, add a category for each of you to give yourselves the freedom to buy a latte or a new outfit guilt-free. Also consider setting money aside for eating out, whether by yourself or with friends, as well as other fun activities. It doesn’t need to be a lot, but denying yourself the possibility of any fun or leeway will quickly burn you out. You can also use the money you don’t spend in these categories each month to save for bigger celebrations or purchases in the future.
Stop Wasting Money on Small Items
When you look at your bank account and wonder, ‘where did all my money go?’ it’s probably because you have been buying small items daily. Purchasing lots of random and unnecessary products will lead to a big number getting swept from your bank account every month. The worst part is since each purchase seems so small and insignificant, the amount your spending adds up to a lot. Instead of letting yourself get carried away with browsing online shopping or going out to get a coffee at least three times a week, pull back and focus on the big picture. It’s okay to spend money on yourself, but be intentional about what you’re buying. Allowing yourself to buy more expensive items less times throughout the month will train your mind to be aware of the purchases you’re making. When what you want costs more money, you have to think about it and decide if it’s worth it.
Revisit and Adjust as Needed
Just because you’ve established your budget doesn’t mean it’s going to stay that way forever. You’re going to have to adjust it if you get a raise, have a child, move or have any other major change to your finances. In between, though, it’s still a good idea to make time to regularly revisit and reorganize your budget. You might need to adjust categories because you realized you put too much or too little in them, or you might want to make room for seasonal purchases like Christmas gifts. If you have a goal you want to focus on saving for, you can restructure your budget to make room for this. Whatever you choose to do, just remember that your budget is a tool meant to work for you, not an inflexible set of rules you set up for yourself.
While everyone’s budget setup looks different, following these general principles will help you successfully track and manage your money. Don’t be afraid to learn by trial and error, and remember that this is to help you find and live in financial freedom and independence, not feel stifled and denied.