Budgeting Tips
#1: Budget for the income you receive, not what you’re supposed to get
This budgeting tips is important, especially if you receive income from things like alimony or child support. If your ex doesn’t pay what they’re supposed to pay, then it can throw off your budget. You can’t depend on that money to cover expenses if isn’t consistent. So, you need to budget for what you actually receive.
#2: Savings should be a fixed expense in your budget
One of the biggest mistakes that most people make in saving money is not including it in their budget. You decide to save whatever you have left at the end of the month. But this is a good way to ensure you never save anything at all.
#3: Divide food costs into two categories
The more you can break up expenses into specific categories, the better off you usually are. One of the most common expenses that benefits from being broken up is food.
But food costs can vary widely depending on how much you cook at home versus eating out. Buying groceries tends to result in a much lower food budget than eating out every day. And while food is a necessity, eating out is a luxury. So, it makes sense to break your food budget up – have one expense for groceries and another discretionary expense for dining out.
Then, if you need to cut back spending for any reason, you know which part of your food budget to cut.
Instead, savings should be a line item in your budget. You determine how much you can afford to save each month. Ideally, you should save about 5-10% of your take-home income or more. Then you set that amount as a fixed expense in your budget. It’s basically a bill you pay yourself each month. This is how you make saving money a consistent habit that you can keep up.
#4: Include expenses for cash transactions and small incidentals
So, if you have small incidentals that you purchase regularly, make sure they make it into your budget. These types of purchases a usually discretionary because they tend to be wants instead of needs. Putting them in your budget gives you an easy line item to cut if you need to increase cash flow.
#5: Set practical targets on flexible expenses
One of the most difficult decisions you make as you build a budget is how to account for expenses that change. By definition, the cost of flexible expenses varies from month to month. You can’t possibly spend exactly the same dollar amount of groceries or even gas for your car.
So, how do you account for expenses that change? There are two options:
- Take an average of three months of spending to set a target
- Find your highest spend in that category and set that as your target
You may choose to do the former for some flexible expenses and the latter for others. For example, taking an average spend works for things like groceries, pet care and clothing. But it may not work as well for things like your electric bill and gas for your car. In these cases, the yearly high may be the better way to go. This also leads into our next tip…
#6: Leave breathing room in your budget with free cash flow
Another big mistake that people make when they budget is budgeting down to the last penny. Some “experts” even recommend that you should allocate every dollar. Don’t do it! It’s a mistake that will invariably lead to credit card debt.
Unexpected expenses inevitably pop up – usually every month. If you’re always dipping into emergency savings for these costs, you’ll never get the financial safety net that you need. A much better strategy is to leave breathing room in your budget known as free cash flow. This money is separate from what you put in savings. It’s basically extra cash in your checking account that you can use as needed.
A good rule of thumb is that the expenses in your budget should only use up 75% of your income or less. That 75% includes the money you pay yourself (savings). That leaves 25% of your cash to cover anything from the dog getting into some chocolate to an unexpected school trip.
#7: Make budgeting a household affair
If one person in your house is trying to budget and save while the other partner is spending, you’ll never get anywhere. So, you need to make budgeting a group-effort in your household. Everyone – including any kids – should know that the household is on a budget. Everyone should do what they can to help save money and achieve the household goals. You’ll make it where you want to be a lot faster if you move forward as a group.
#8: Use your budget to pay off debt faster
One of the best things about having a budget in place is being able to use it to achieve key financial goals. Once you set up a budget with built-in savings, you can allocate extra funds to paying off debt faster. Here are a few tips you can use:
- Set up a credit card debt reduction plan so you pay off your balances and minimize interest charges
- Use your budget to make extra payments on loans that don’t have early repayment penalty fees
- Consider the value of making an extra mortgage or car payment once per quarter to pay off those debts faster
- Get your finances organized, so you can use faster student loan repayment options, such as private consolidation or a graduated repayment plan for federal loans.
#9: Right size your emergency savings fund
If you don’t have anything in savings, then your first goal should be to save E1,000. This is a good starting emergency savings fund, since it will cover most unexpected expenses. However, it’s not nearly big enough to be the full emergency savings fund you need. For that, you need to do some calculations to determine how big your emergency savings fund really should be.
Most experts recommend that you should save 3-6 months of budgeted expenses in your emergency savings fund. This fund should be large enough that you could live on it if you lose your job or are unable to work for a few months. The idea is that you could survive a period of no income without taking on massive debt.
#10: Revisit you budget anytime there’s a change
While you don’t need to pay attention to your budget day-in and day-out, you should always go revisit your budget when there’s a change in your financial situation. Anytime your income increases or decreases, you need to adjust your budget accordingly. You should also revisit it anytime you take on a new recurring expense, such as a new streaming account or magazine subscription.
What you don’t want to do is run the numbers in your head and assume everything will be okay. Just take an hour to write it all out and determine that your budget is still balanced. It will give you peace of mind and help you avoid debt.
source: www.debt.com/edu/budgeting-tips/