A well-laid budget makes huge sense for achieving your financial objectives. It also helps you pay down debt, save money, and make the most of your every dollar. However, as FINRA's 2016 National Financial Capability Study reported, many Americans are still susceptible to financial stress and cannot cover even three months' worth of expenses once they become ill or lose their job. Furthermore, according to a survey of 2016 GOBankingRates, seven out of ten Americans have less than $1000 in a savings account, while more than thirty percent have no savings at all. Setting up a budget from zero may seem quite overwhelming, but it is not as difficult as many imagine. Here are some of the best financial habits you can adopt to build a strong budget and attain both primary and secondary financial goals.
Track of Spending
The first step in learning how to budget is to keep track of your finances regularly. For at least a month, keep a careful check on the money coming in and out of your account. Then, itemize all costs to get an exact idea of how much you spend on every purchase, no matter how minor. This will likely help you decide how much cash you need to satisfy your unique financial demands. Just be careful not to be overly thrifty, as inadequate restrictions might lead you to failure. For instance, if you grab a cup of coffee every morning on your way to work, try cutting back to once or twice a week and put aside money for an emergency fund.
Setting up Spending Priorities!
Setting aside your after-tax income is an integral part of your monthly budgeting since at least one-third of your discretionary income should be spent on your home maintenance. According to the U.S. Department of Housing and Urban Development, mortgage (or rent) and utilities should account for 25–30% of your family income.
Keep Things Simple!
Many financial experts offer the 50-20-30 rule for efficient budgeting when your monthly paycheck is categorized into three sections. The rule proposes to direct half of your income for essentials, including household expenses, transportation, grocery bills, and clothing-related costs. Then, you set aside 20% of your earnings toward savings. Saving money may become quite easy when you set up automatic fund transfers into your savings/investment account every month. The remaining 30% might be spent to satisfy your "wants," such as pay for a gym membership or coffeehouse drinks.
Focus on the Most Expensive Debts First!
After you've determined where your money is going, turn your attention to your debts. Pay off the costliest loans first. Credit cards or short-term loans such as payday advances require the most focus, as high-interest loans can drain your budget quickly. Pay more than the minimum monthly installment to lower the outstanding balance on your debts and get your finance back on track.
Be Prepared for Unexpected Expenses!
As it was stated above, many Americans still struggle from lack of financial preparedness when facing emergency expenses. Of course, debt repayment is an inherent part of good budgeting, but you remember that cash reigns supreme. Thus, consider paying yourself first and establishing high-yield savings/investing accounts to improve your financial performance. Also, remember that no amount is too modest to put aside on a rainy day.