A high income does not necessarily translate to a healthy bank account. It really isn’t about how much money we make but how much of it we are able to preserve.
Spending less than we make is often cited as the most important personal finance goal. It can also be really difficult to accomplish. It helps us get out of debt, save for emergencies, and stash money away for retirement. It’s the primary habit that enables us to achieve some level of financial freedom.
1. Understanding why you need a budget: The goal of a budget is not to track every dime we spend. That’s certainly one way to budget, but it’s not the goal. In fact, one can know where all of their money is going and still not have an effective budget. The goal of a budget is to help us control our spending so that we can spend less than we make and focus our spending on what matters most to us. However you choose to budget, it should meet this goal. If it doesn’t, you’re doing it wrong.
2. Save First: Remember that the goal of budgeting is to spend less than we make (i.e., to save money). One of best ways to do this is to save first. Rather than saving what is left over at the end of the month, save first and spend the rest. This strategy takes advantage of behavioral finance. By making saving a priority, we are less likely to spend our savings during the month.
3.Try the 50/20/30 Plan: This approach to budgeting benefits from simplicity. With this plan, 50% of income goes to necessities, 20% to long term savings, and 30% to lifestyle choices. This plan can be a good starting point for those struggling to decide just how much they should spend on individual budget categories.
4. Use the 3-Category Budget: Given the goal of budgeting, most people do not need to track every dime they spend. For example, knowing how much you’ve spent on petrol may be interesting, but if it doesn’t change your behavior, there’s no point in tracking this expense. Most people overspend in just a few categories. Common examples include eating out, buying clothes, buying gadgets, and entertainment. Using the data accumulated from tracking your spending, pick the three budget categories you’d like to bring under control, and monitor your spending in just these areas. The 3-Category Budget is easy to implement and can have a significant effect on your finances.
5. Charge It: Paying with plastic is an easy way to monitor spending. If you need to know how much you spent on something during the month, you’ll have the information at your fingertips. Use a bank debit card or a prepaid card instead, preferably one that charges very little in fees.
6. Track Spending for a Week: Tracking every dime you spend for a short period of time will be eye-opening. It will show you how spending even small amounts of money adds up over time. It will also reveal areas of spending that otherwise go unnoticed. Ideally one should track their spending for a full month, but even tracking for a week can provide valuable information about your spending patterns.
7. Use the Right Tools: Finally, using the right tool can make budgeting more effective and less painful. There is no single best budgeting application. What works best for one person might not work best for somebody else. Yet, there are several really good budgeting tools that are either free or very inexpensive. Many of these tools link directly to your bank account and credit cards to automatically download and categorize transactions. They also come with smartphone and tablet apps, and they provide a clear picture into how money is being spent.