Last week we focused on that first step for becoming more financially healthy in 2017 – tracking your spending habits on a regular basis. Now it’s on to the next step – analyzing those habits and coming up with a budget that you can live with.
Your review of your spending patterns should naturally reveal a “needs vs. wants” scenario. Your needs include housing, food, and transportation, while wants that are typically encountered are dining out and going to movies or concerts several times a year.
Once you explicitly define where your money is going, you can come up with a plan to allocate your funds more prudently. On the flip side, you need to get a handle on all your income sources on a weekly or monthly basis. Armed with this information, it’s time to develop a budget.
Experts warn that someone new to budgeting may be inclined to be overly frugal and curtail all wants. That’s not a realistic approach, they caution. Instead, moderation is the key to success. You’ll be more inclined to stick to a budget if it’s reasonable.
Rather than take all the fun out of life, give yourself some leeway and treat yourself to drinks at your local tavern twice a month instead of every week. Or cut your expresso indulgences in half.
And the money you save from those splurges? Put it in a savings account. If you can do it, use direct deposit or automatic transfers into your savings account so you won’t even see that money. If you don’t see it, you won’t miss it.
Rather than racking up debt on a credit card, choose to use your debit card. Because it is like cash, you can only spend the money you have available. Use it for clothes, groceries and gas. Set aside a certain amount of the cash in your account each month and stick to spending only that.
If you do have credit debt, your budget should include a plan to pay it down. Those interest payments you’re making are robbing you of the chance to contribute more to savings or have more to devote to non-essential items (like the concerts!).
Experts advise those with multiple credit card balances should focus on paying down first the card that has the highest interest rate. Once that balance is cleared, it’s on to the next card with the second-highest rate. You could also consider a debt consolidation program as long as it doesn’t cost you more money in the long run.
It’s also wise to establish an emergency fund so you have a financial cushion to fall back on in case of an unexpected bill, loss of a job or an extended illness. This “rainy day fund” should have enough to cover 3 to 6 months’ worth of living expenses. Again, be realistic – if you can’t create this fund right away, at least start out by putting some money aside each week.
Once your budget is in place, consider it a work in progress. Be prepared to tweak it here and there to make it a livable financial framework. And reward yourself (moderately, of course) once you start achieving budgetary milestones like paying off a credit card balance.