One of the most popular New Years’ resolutions is to get your finances in order. If you have a problem when it comes to how to budget your money, you are in good company. About 80% of Americans are living with some kind of debt.
There are ways that you can budget your money so that you are prepared for the expected and unexpected expenses that pop up. Following a few simple suggestions will ensure that you are able to keep that resolution and learn how to budget your money.
Dispelling Money Myths
There are a few myths about money that you may believe may actually be impeding you from being able to effectively budget your money. A big myth that a lot of people subscribe to is that your money is best put in the bank.
While it is true in your early days of budgeting having separate bank accounts to keep track of spending is a great tool, but if you have credit card debt that you are paying high interest on, and you have savings that are earning about 1% in interest, it is best to pay down the debt first. Simple math reveals that while savings is earning you 1% interest, you are paying as high as 18% in interest, which means your savings is actually a loss of about 17%. Pay off your debt with that money.
Another myth about money is really a sales tactic. Debt is a tool to get the things you need. Debt makes ownership more affordable because you can break your payments for your goods into monthly payments. It is not true, debt is expensive. Living below your means and putting money to the side to buy the things that you need and want outright is a much better way to build wealth.
When it comes to the debt you may hear a lot of chatter about paying down the largest debt first with the highest interest rate. Yes, it is always good to pay down debt with killer rates, but there is a lot to be said about tackling the little ones first. A boost to your credit score will come when you pay down or pay off smaller debts, and they can be a lot easier to tackle. In other words, you may not be able to get to the big stuff just yet, but that does not mean you should let the little stuff just sit. Budget your money so that you can make at least 1 extra payment each month toward something.
Here are some other myths you need to ignore:
- Buy in bulk to save. If you have a family this could work, if you don’t ignore it.
- If it is on sale you should buy it. Don’t. If you don’t need it don’t buy it simply because it is a good deal.
- You pay for what you get. This old saying may be true when it comes to certain things, but mostly, if you are paying more for an item because of its label, you are just paying more.
Changing how you think about money will help you budget your money more effectively. As Americans, we are over consumers. It can be tempting to fall into some of the traps that are sold to us about money. Budgeting money is like going on a financial diet. When you are trying to lose weight you take less food in and put more energy out. When you are on a financial diet to better budget your money. You try to take more in and send less out.
There are certain things that you cannot cut out of your life to help better budget your money. You have to pay for water service, you have to pay for electric service, for shelter, food, and insurance. However, pretty much everything else is negotiable.
Budget Your Money to Prepare for Financial Emergencies
When you budget your money do you think “what if I ever need to hire a bail bond agent?” Probably not, but while bail may not be a primary concern, there are other things that can and will go wrong that you need to be financially prepared for.
The ultimate goal when you budget your money is to be prepared for those “are you kidding me right now” moments in life that require some financial support. Anything in life can happen from needing sewer line repair to getting emergency car repairs to suddenly being unemployed.
How do you build a nest egg that will be ready to fund your next emergency? First things first. Pay down your debt. There are plenty of methods to paying down debt that really works. Like the snowball method. Start with your smallest debt. Pay it off first, while making minimum payments to the higher debts, then move up the ladder. Once you have your debt under control, you can start really focusing on putting money aside for the things you want like fence installation services, and the things you never see coming.
You have to learn how to pay yourself first, divide your money into different accounts (which can be envelopes if you don’t want to deal with the banks) and how to apply the money that you do have coming in to do the most good.
Budget Your Money By Doing These Things
If you want to be prepared to pay that HVAC service bill if your HVAC goes on the fritz, you are going to have to start from scratch with your budget. Most people do not track what they are spending. That is a huge mistake. Do a little experiment to see where all your money goes. Write down every dollar that you spend for the month. Include everything from tipping the guy that brings your groceries to the car to your light bill.
After the month evaluate all the little things that you are spending money on like that daily stop at the coffee shop. Prepare to be amazed. It is very likely that you are spending a couple of hundred dollars a month on literally nothing tangible.
Here are some money thieves that you likely are not aware of:
- Streaming services. It is not unusual for people to be double-tapping when it comes to streaming. There are so many streaming services out there that offer the same or similar content with maybe one or two shows that are different. Evaluate what you are paying for and what you can live without.
- Convenience store stuff. You run into the convenience store on the corner for a quart of milk and grab a few other things that are far more expensive there than at the grocery store. That adds up pretty fast.
- Personal items that we “need”. Do you really need that $25 shampoo? Probably not.
When you budget your money and really start to look at the waste and get that under control you can build up that nest egg pretty quickly. Consider if you are paying $10.99 for a streaming service that is really a duplicate of another service and you cut that out of your budget that is $131.88 a year in savings. If you do that across the board you can easily realize at least a few hundred dollars in savings a year that can now go toward paying the fencing contractors.
The fact is if you live lean when it comes to your finances and you make choices not based on where you are today but where you want to be in five years, it will be a lot easier to budget your money for HVAC replacement and a wide range of other costs that may come at you. Cutting the fat from your budget is the best way to get started saving for a rainy day.
Set Goals When You Budget Your Money
Budgeting your money does not have to be all dark and doomy. It can be fund to budget your money if you have a goal. For example, you want to buy a new car. Your old car is getting by and probably has a couple of years of life left in it. Figure out what the cost of a new car will be and figure out your monthly payments if you finance it.
After you have all your numbers together, start paying yourself every month. Make that car payment to yourself. Put the money in a separate account every month. By the time the old car gives out you will have a nice chunk of change to go buy that new car.
To successfully budget the money you have to keep your eye on the prize. Let’s say you know you are going to need seawall erosion control done soon to your home. While this is not a necessarily joyful goal to work toward you will get peace of mind knowing your property is safe. Get quotes for repairs, then figure out how you can break that up into payments, and pay yourself the money. Before you know it you will have the amount you need to get the repairs done.
You can use this goal method for all your financial needs. Paying yourself first with a goal in mind can make it easier to budget your money and it has the added benefit of developing good money habits. With planning and discipline, you will not have to take credit.
You can budget your money and get the things that you need and want in life, while you get the sewer line repair that you need if you balance things out. Putting money on the side to cover all your needs is possible no matter what your income level is.
Upping Your Income
If you are doing all that you can do to budget your money and you are still falling short, you can find ways to up your income. Instead of taking credit for the water well drilling services you need, consider getting a part-time job and using that income to put money to the side for it.
Being prepared to pay for gutter services or other needs for your home can mean getting a part-time job at least for a little while. Saving that extra income to put toward emergency needs and to pay for the wants that do not necessarily fit in your budget is an easy way to budget your money.
A lot of people make the mistake of thinking that they can maybe get the cash that they need for emergencies from going to the pawnshop. The fact is selling off your goods is another way that you will lose money. For example, selling your $2000 Mac Book at the pawnshop will get you on average about $250. Likewise selling a diamond ring that is worth a couple of thousand of dollars will likely net you about $466. Is it worth it? Absolutely not. It is far better to be ready for a financial crisis by making sure you budget your money for a rainy day event.
A part-time job or a side gig can net you about $200 a week or more. If you put that money on the side for one year you would have close to $10,000 saved. What could you do with $10,000? What if you got that part-time job or a side gig and used that money to pay off your debt? Imagine the difference it could make in your financial health.
Don’t Look At It Like a Punishment
It can feel sometimes like when you budget your money you are punishing yourself by denying yourself the rush that constant spending can provide. It is not a punishment. Make a game out of staying on your budget. Reward yourself when you meet little goals (don’t reward yourself by spending money). When you learn how to budget your money well you have peace of mind. You worry less about money, and you get to enjoy life more. Budget your money with a short term plan and a long term plan in place and before you know you will be on the path to meeting all your money goals.