Setting a winning budget step-by-step
Ever feel like there's too much month at the end of your money? I know I do sometimes. The fact is times are tough and if you look back to perhaps 2-3 generations back, cost of living has gone up over 200% percent since then! Naturally, this impresses upon many the dire need to take care in their spending.
Why set a budget? Yes it feels good to just keep spending and enjoying what you have worked so hard for. A budget is a way to work toward your long-term goals, therefore you have to think long-term. No matter how much you earn, becoming wasteful in your spending or living beyond your means is never a good idea if you can avoid it.
If you take just one thing away from this article it should be this: most people spend more time planning their holiday than they take planning their finances! Most people spend maybe 10 hours in their lifetime planning their retirement but spend many more hours planning their holiday. Problem? Foresight. Yes it can be uncomfortable to plan for the future but the decisions you make in one day can affect you years down the line.
STEP ONE: Set financial goals Blindly saving is like driving to go on holiday but not having a destination. Where will you end up? What do you have to look forward to? If the answer is nothing, then you have nothing to look forward to. How long do you think you will keep traveling? I'm sure you will not get as far had you planned.
STEP TWO: Quantify Write down your all forms of income and expenses. Use your previous 3 months bank statements in order to get an idea of when your financial habits are like. See what expenses are essential and which are not. Write these down separately and see where you can cut-down. Take your monthly earnings and divide that by the number of days in the month that you spend working. Then you will come to what you earn per day. This will actually give you a shocking amount of perspective if you are tempted to spend unsteadily.
STEP THREE: Create and action plan Below are some suggestions to put in your action plan. Example 1: if you are spending a lot of money on entertainment and perhaps you are going out 5-6 times a month to restaurants, movies and so on. Look at not cutting this out completely but look at reducing and see what you can save by doing so. Example 2: You may want to invite people over and ask them to bring a few things rather than going out. Your cost of being social will often be more than halved. There are other ways enjoy your money without over spending. Part of the key is to substitute expensive activities with more reasonable ones. Example 3: Part of your action plan can involve staying away from places and perhaps even people that you know will cause you to spend excessively. Example 4: Work to create a reserve for unexpected expenses. This will help you to avoid going into debt and paying interest and therefore effectively saving you a lot of money.
STEP FOUR: Attitude Being content is actually highly important. Envying others and racking up debt just to have nice things will take away one of the most important things in your life and that is freedom. Ask yourself, do I control my money? Or does my money control me? Often times many people who have many nice things are in debt and therefore will spend a long time working off that interest, therefore becoming like a slave to someone else. Never underestimate the power of being grateful for what you already have.
What about Debt? Not all debt is a bad idea if you can afford to pay it. For example you could rent a home, however you may find that getting a bond and paying off a property will not be that far from what it costs to rent. In the end you will land up with an asset.
If you currently are trying to get out of debt, one way to do this is to pay-off the smallest debt first as this will free you from at least one debt and mainly paying that interest.
Disclaimer: This article is not financial advice.