It all starts with a dream and a goal.
Before you start cutting expenses and allocating funds, think about why you want to tighten your spending plan. Are you hoping to become debt free? Saving for a dream vacation? Wanting to retire early? Thinking about buying a house? By determining your long-term financial dreams, you can start making goals to reach them.
First think of how much money you will need, then come up with three smaller tasks (with deadlines) to help you succeed.
TIP: Once you have met one of your small goals, treat yourself! Buy something small off of your Amazon wish list or enjoy a guilt-free day of relaxing and watching movies. Be creative!
Evaluate your income.
When analyzing your income, use your net income (the amount you receive after taxes, insurance, child support, etc. have been deducted). The trick is to plan your budget around your STABLE income. If you can’t rely on specific funds (such as seasonal pay, overtime, etc.), don’t include them in your spending plan. Instead, think of that money as a surplus.
Track your expenses.
This is important. Before you can start your spending plan, figure out which expenses are fixed or variable. Your expenses that always stay the same (fixed) would be your mortgage, rent, subscriptions, etc. A good example of a variable expense would be your utility bill as it can vary month-to-month.
TIP: For your variable expenses such as groceries, track how much you spend over multiple pay cycles, take the average and use that for your budgeted amount. If you spend less at the grocery store one week, save the extra money for when your food bill may be higher.
Don’t forget to pay yourself.
Usually, it is recommended to save a specific percent of your paycheck before you start to spend. If you are already living paycheck to paycheck, this spending pattern could be difficult and seem out of reach. Instead, start your saving habit by planning to set aside a specific amount. By starting to save, even if it’s ten dollars a paycheck, you are preparing yourself for an unexpected expense.
If you are only paying down debt and not saving, all of your budgeting progress could be lost when an emergency arises. Forgetting to save causes debt spirals and can lead to a credit crisis.
Instead of planning for a budget that you hope to stick to, plan for what you know about your spending habits. For instance, if you know that you like to go to the movies with your friends once a week, don’t cut fun completely out of your spending plan; instead, try going once a month or every two weeks. By severely depriving yourself of your “wants” and only planning for your needs, you may be setting yourself up for binge spending or a loss in budgeting momentum.
Have a plan for windfalls and hard times.
Before you get your tax-return or have an unusually high phone bill, have a game plan in mind. When you have a financial surplus, will you save some and spend some? Will you use it all to pay down debt? The same goes for when your income falls short and can’t support your budget. Will you spend less on groceries that month? Take a break from Netflix for the summer (when you may be inside the house less)?
TIP: Write down your commitment and how it can help reach either a small or large financial goal and STICK TO IT!
Include the entire household in budgeting decisions.
Spending plans are rarely successful when one person makes all the decisions. Even if the budget is do-able, some family members usually have differing opinions, which can lead to arguments and budgeting rebellions.
To avoid a financial falling-out, have a household meeting to discuss step one (goal setting); doing so turns enforcing the family budget into a group effort. If the family’s goal is to go to Disney World, the kids may be more understanding about having dinner at home rather than their favorite restaurant.
By including the entire family, young members of the household can learn about responsible spending at an early age.
Think about allowances.
Allowances are a great way to teach kids about positive spending habits AND keep your budget balanced! Children can sometimes be wild cards when it comes to sticking to the family spending plan, but with an allowance and a clear understanding of the family financial goals, you can keep your budget on track.
Instead of giving your teen money when they are going out with friends, teach them to budget their allowance while balancing their wants and needs. Regularly handing out cash can break a budget and affect your child’s long-term spending habits.
Consider a rapid debt repayment plan.
If one of your financial monsters is too much debt, consider a rapid debt repayment plan. Free websites such as powerpay.org can help you structure a plan to cut YEARS off of your payments while spending less on interest. This is done without paying more than your current monthly commitments.
Once debt “A” is completely paid, the funds normally used for that loan are allocated to debt “B” along with the usual monthly payment for “B”. This method also allows to put a portion of a surplus towards debt or save your entire surplus but continue to pay down debt like a champ.
When participating in a rapid debt repayment plan, find what will motivate you to stay on track. Some people prefer paying down their highest interest debt first to save more money, while others like to pay the smallest debts so they can see fast results. Whichever you choose will be a huge step towards financial freedom.
TIP: For rapid debt repayment to work, stay away from creating new debt.
A budget is a living, breathing thing.
If your spending plan doesn’t work, change it! Nothing is written in stone. It should be noted that if you are having to rely on credit to make your budget successful, it needs to be reworked. If after re-evaluating and analyzing your budget it still isn’t meeting your needs, contact your local credit union or a reputable financial counselor before taking out high-interest debt, payday loans, borrowing against your 401k, etc. The biggest budgeting mistake you can make is giving up! Keep trying!