Budgeting can be a critical part of your financial health, helping you repay past debts and save for the future. Here are five tips for budgeting:
Before creating a budget, put some thought into the steps that will help you maintain the discipline to stick with it. Some people can simply track their expenses and use sheer force of will to stay below the amount budgeted for expenses. Others require more help in maintaining discipline.
For example, some people physically separate amounts budgeted for expenses from amounts budgeted for savings and paying off debts. Once the expense money is spent, that is all that is spent, except in the case of an emergency. For people with no bank account, expense money may be kept as cash in an expense envelope or loaded on a prepaid card used solely for budgeted expenses. For those with bank accounts, expense money may be kept in an account separate from savings and debt repayment money.
Budgeting requires a realistic assessment of income. Fortunately, the current job market is fairly worker-friendly, with many more jobs than workers.
For purposes of budgeting, the income number you need to know is your net income (also known as your take-home pay). This is your pay minus taxes. If you earn an hourly wage, your budgeted income is not the $17 per hour you are paid. Rather, it is the actual amount of your paycheck, once you account for the number of hours you work and the amount withheld for taxes.
Your expenses can be broken down into two categories:
- – Mandatory expenses: These include expenses like food, clothing, housing, transportation, health care, childcare, and utilities, that must be paid to live and work.
- – Discretionary expenses: These include everything else that you spend money on, including entertainment, eating out, and gifts.
Fortunately for budgeting, mandatory expenses are typically easy to determine because they are associated with fixed payments. For example, rent or mortgage payments, health insurance premiums, daycare, and car payments are a fixed amount due on the same day every month. While certain expenses, such as utilities and food, may vary from month to month, you should be able to determine an average amount to budget for these categories of expenses by tracking these expenses over a few months.
Discretionary expenses are where you have some flexibility in your budget. While they seem like necessities, cable TV or Netflix are discretionary expenses that can be cut if necessary. On the other hand, trading $100 per month spent on movie tickets for $13 per month spent on Netflix may be a smart budgeting move. Although it may seem unnecessary while rebuilding credit or recovering from a financial setback, budgeting some amount for discretionary spending is often advisable because it reflects reality and some entertainment is necessary for mental health. After all, no one should have to pass up a candy bar in the checkout aisle after a stressful day at work.
Half of American households are living from paycheck to paycheck. This is a dangerous situation because these Americans have no savings to cover an emergency expense (such as repairing a car or replacing a hot water heater) or withstand losing a job or missing work. Having a budget may help you recognize expenses that may be cut so that the money can be reallocated to savings.
When unexpected situations arise, many households rely on debt to overcome them. For example, finance options that most Americans look at for water heater financing, furniture financing, or even optical financing for eyeglasses, include credit cards or store loans. However, debt and its associated interest and fees can destroy a budget.
Rather than immediately turning to debt for emergency expenses, such as furniture financing, it may be worth investigating more budget-friendly options. For example, lease-purchase programs for furniture financing are structured so that the leasing company purchases the furniture from the furniture store, then leases the furniture to you. You make a fixed monthly payment that can be included in your budget in exchange for using the furniture. This type of furniture financing is both budget-friendly and can help you rebuild credit as monthly payments are made on time.
In sum, budgeting often comes down to maintaining discipline, being realistic about income and expenses, and managing debt.