As an adult, you have to make decisions every day that affect your short- and long-term life plan. Whether you promise to get your third-grader a bunny if she gets all A’s or opt for a second salted-caramel Frappuccino, your daily choices add up – literally.
Even the small details can have major impact on your bank account over time. (more…)
Be aware of spending to stay out of debt
Create a budget. Of course, not any budget will do. Like a fitness routine, your financial plan must be manageable or you won’t keep it up.
Instead of going cold-turkey to quit coffee, “slowly ramp up your efforts to cut costs,” says Abigail Perry of ipickuppennies.net. “Starvation diets don’t work, whether they’re food or finances.”
On the other hand, slow doesn’t mean dead in the water. It’s still important to be mindful of that daily coffee habit and set a budget that is founded on facts.
Certified financial planner, Rachael Grattan of Adam Financial Associates, stresses that a successful budget always starts with the hard numbers. It’s about “awareness of what you’re actually spending,” she says. Not surprising, Grattan finds most people underestimate how much they spend. “They don’t realize how much daily coffee trips add up, or forget about their cash spending,” she says.
Budgeting can be difficult. Regardless of where your bank account stands, you can create a successful budget by digging into your current lifestyle and making small, manageable changes that propel you forward.
Here are six steps you can take right now to create a stress-free budget that lasts:
1. Know your annual net income
Net income refers to what you bring home after taxes plus investments. For instance, your employer may offer a 401K retirement savings. They may even match your contributions up to a certain percentage. Factor all of this into your annual take-home pay. Other potential income sources include your spouse’s income, part-time work, interest on savings as well as social security or alimony payouts.
2. Calculate all costs
Look at last year’s cable bills, rent checks, gas receipts and any other regular expenses. Grattan recommends starting with annual expenses to make sure you capture it all. And don’t forget the infrequent expenses, as well, such as annual property taxes or semi-annual auto insurance premiums.
3. Expect the unexpected
You’ve likely heard the rule to always have at least three to six months’ worth of expenses in savings. Indeed, having an emergency fund is a smart idea. However, if you can’t afford to put away thousands of dollars right now, add a line item to your budget and add whatever amount you can manage right now. It could be $50 per month or a $500 lump sum. Accounting for unexpected medical expenses, surprise travel plans or even a natural disaster will always pay off later.
4. Divide by 12 and subtract
Now that you’ve determined your total annual income (after taxes), all yearly costs and the amount in your cushion fund, you can break down the budget even further. Perry says, “I think monthly works best for a lot of people, but you could always have a semi-monthly [budget] as you get each paycheck.” Divide your income by 12 and divide your total costs by 12. If you’ve settled on a monthly contribution to your emergency fund, add that monthly number to the monthly costs. Subtract monthly costs from monthly income and make sure you’re in the black.
5. Capitalize on convenience
- Automation: If you really want a budget you can stick with, automate your bill payments and set up automatic deposit for your paychecks (if available). You can even automate your savings efforts with an app that rounds up your purchases to the dollar and stashes away that spare change.
- Tracking tools: Technology has made budgeting much easier than it was even a decade ago. Grattan suggests budgeting software to make your life simpler. Mint.com, for instance, aggregates credit card and bank account transactions and categorizes them based on the type of vendor.
- Shop online: Don’t limit your online shopping to drones and toy dragons. Find a loan or credit card online that fits your financial plan. These services are often free or have free trials to get you started. A credit card with a lower interest rate and zero penalty for balance transfer could be all the difference you need to get your spending on track.
6. Adjust as needed
Many financial planners will suggest you keep regular expenses to a percentage of your income. Grattan says, “28% of monthly income is a common rule of thumb for rent/mortgage amounts. Make sure to also factor in upkeep and repairs to your budget if you own a home.”
If you’re ready to get into the weeds of budgeting, following recommended budget percentages is a good next step. The percentage method gives you goals to work toward if you currently fall above the recommended range for any category. For instance, if your transportation expenses are more than 15% of your net income, it could be worth your while to join a carpool group or take public transportation more often.
Changes in your budget may also come if you’re working toward a big promotion. When the time comes, you can adjust your budget based on any additional income after – and only after – it goes into effect.
Until then, stick to your plan, come back to these steps for guidance and take advantage of technological conveniences to make budgeting a breeze.
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