Hack: How Having a Personal Budget Will Keep You Ahead Financially

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“Becoming rich is hard. Staying broke is hard. Choose your hard.” ~ Eric Worre, Author, Network Marketing Expert

You never miss routine dental or medical checkups because they are critical for your health, as they play a detrimental role in identifying critical illnesses or other health issues at an early age. However, when it comes to your financial health, the same preemptive cautions or actions are ignored by almost 40% of the fellow Americans. The Certified Financial Planner Board of Standards found that 2 in 5 Americans never had a budget before. Furthermore, 3 in 5 Americans do not track their expenses. Much like any other area in life, when ignored, finances could become messy, complicated, and distressful over a long period.

Since you’re searching for tips to create a personal budget, you’re already on the right track. Planning a budget could get overwhelming initially, so here are some simple steps to get started.

Breaking a myth: It’s not only about cuts, limitations, and sacrifices

Amateur financial planners have popularized the idea of a minimalistic budget. When you create a budget that deprives you of your pleasures, doesn’t accommodate your habits, or introduces abrupt cuts in expenses, it is doomed to fail. Budgeting is all about cautiously planning your financial life so that you stay in control of your finances. If you have developed some bad money habits, eliminate them gradually, taking some corrective measures every month.

Financial awareness: Your current savings, monthly income, total debt

We suggest you take a comprehensive approach towards budgeting, starting with an in-depth analysis of your financial standings.

Find out your current savings

How do you save money? Do you put it in a savings account, a checking account, or investing in different assets? The reason why we ask you to identify current savings is to make sure that when you create a personal budget, you can allocate or distribute your disposable income to the right accounts.

Track your monthly income

If you are a salaried employee, tracking your monthly income is easy. However, self-employed professionals or small business owners may find it challenging to identify their monthly income. In the latter case, start by putting together your account statement for the past six months or a year and track your income flow. This will give you a fair idea of your average income.

How much debt do you owe?

The public debt on Americans is over $16.2 trillion, along with the net national debt of over $22 trillion, and it is likely to grow over the coming years. It is critical to find out the net debt you owe to lenders. It could be a mortgage, student loan, auto loan, or credit card loan. A close look at your account statements should help you figure out these expenses. It is critical to note down individual interest rates for each of these loans and rank them in the order of highest interest rate first.

List your monthly expenses: Grocery, utility, transit, college expenses, daycare or elderly care expenses

It’s time to dig into your monthly expenses. This is a detailed process, so put up your sleeves and take that calculator, excel sheet out.

Start with the basics

  • Utility bills: This section will include all of your utility bills, such as electricity, water, broadband or internet, gas, sewer, and trash bills. Most of these service providers send itemized bills, so check your registered mail and create a list of these expenses.
  • Housing: Your monthly rent or mortgage payment is a significant part of your monthly expenses. Make sure to add other costs such as maintenance charges, property taxes, furnishing, appliances, and insurance payments. The average American household spends roughly $1,573 on housing.
  • Grocery shopping: How much do you spend on grocery? Most of the people fail to keep track of grocery expenses. You can do it by using cash for grocery, storing monthly grocery receipts, or through apps like Shopper or Grocery IQ.
  • Entertainment expenses: What we don’t realize is that entertainment expenses silently eat away thousands of dollar every year. A report on CNBC indicates that between couples, there are duplicate entertainment subscriptions, such as Netflix, Amazon Prime, or Hulu premiums. These subscriptions could add up to $300 monthly without even considering movie nights or other expenses on entertainment. List all of your subscriptions and what you spend on them.
  • Dining out or take away food: Americans love dining out, as indicated by a report on CNBC, and it costs an average household over $3,154 every year. You need to find how much you spend on dining out or buying packaged food. Start by checking the charges on your credit card, including buying lunch at the office, dining out with family, and even friend.
  • Miscellaneous expenses: This category includes a myriad of costs starting with transportation, personal care, alcohol or tobacco, and apparels.

Track insurance, taxes, and healthcare/childcare expenses

  • Healthcare: Find out how much you spend on healthcare every month. It includes expenses like health insurance, prescription drugs, medical services, and paying for elderly care for a parent.
  • Education: The student debt crisis has become a part of every average individual, so it is critical to take into account student loan or any other expenses on education.
  • Personal insurance or pension taxes: Start with your social security payroll tax and add other premiums, such as life insurance, term insurance, or pension contributions under this category.
  • Personal taxes: Find your effective tax rate and how much it costs per month. For salaried people, your employer includes this information on your salary stub. For self-employed professionals or small businesses, should do an internal calculation and set apart this amount every month.

Match your income and expenses to find if you’re overspending or underspending

Now that you have a complete list of your income and every single expense, it is time to do the maths. Find out how much money do you save at the end of the month after taking out all the expenses. If you’re underspending, congratulations, you’re doing a good job. However, if you’re in the negative, it is time to implement some corrective measures.

Corrective measures for those in negative

  • Find out the categories that you can target first, such as entertainment, alcohol or tobacco, and dining out.
  • Be realistic about how much you can save under these categories. Depriving yourself completely will generate short-term results only.
  • Consult a financial expert if you’ve excessive debt. Try and pay down debts with the highest interest rates first.

Tips for those in a positive range

  • Allocate more to savings and investing. Since you have some spare cash, boost your retirement savings, or pay down high-interest debt.
  • Create an emergency fund and start saving at least a little every month ($100 to $300).
  • Despite being in positive, adjust your expenses and see if you could save more. Use this additional money for your short-term or long-term goals.

Track and review your budget

In order to be financially successful, you need to excel in tracking your expenses. It could be a notebook, an excel sheet, or an application. The idea is to be aware of how much money you have in your account at any time. If something doesn’t seem to work, adjust your expenses under different categories, and monitor the results. You can benefit from micro-savings apps such as Acorns that allow you to save on a daily basis.

Always remember that being financially well doesn’t have to complicated. It is all about knowing where you stand financially and being able to adjust your expenses to stay in the green.