2020 taught us the importance of budgeting and having liquid money or savings. As you already know, most people faced unprecedented challenges such as job losses, shrinking income, or high medical bills caused by the pandemic.
All these situations had a spiral effect on the market, and most people with loans struggled to meet their payments. This brings us to budgeting and how it can offer long-term solutions to financial planning and avert such crises in the future.
In particular, the following budget tips will help you manage your finances. Read on.
Set Financial Goals
Dealing with money prudently entails managing, saving, and investing in such a way that you become financially independent and are always prepared for setbacks.
Make up Your Mind
In budgeting, you need to set your financial goals, which is the foundation of sound money management. Making up your mind involves asking yourself a set of questions such as;
- Why do you want to save?
- And how much do you want to set aside?
- What kind of future do you want for yourself?
- Do you want a zero balance student loan debt?
- Can you save money instead of wasting it all on unnecessary things?
- Are you planning a sabbatical or vacation? How much do you need?
- Do you want to afford a comfortable home with a backyard where you can have barbecues or play fetch with your dog?
To accomplish any of those things, you need to set financial goals and start saving in good time to achieve them.
Another step to making your dreams come true is having a plan and understanding what you need and want. When it comes to your finances, start by thinking about what would make you happy. From there, you can set realistic goals and implement your plan.
Having dreams and goals is one thing, but making them a reality is an entirely different task that requires a lot of dedication and planning.
Setting short-term goals is a great way to build confidence and pave the way for achieving your long-term goals. You’ll be one step closer to reaching your goal by taking small steps and setting achievable targets.
Here are five things you can do to accomplish your financial goals.
1 Your financial goals are not set in stone, and that’s okay! You can review and revise them as time goes on.
Give your money a specific purpose by listing the needs you want to accomplish over a certain period. Doing this will help keep you on track financially.
2 It’s important to have short- and long-term financial goals to stay on track. A short-term goal can last anywhere from 6 months to 5 years, whereas a mid-term goal is set for 5-10 years down the line.
Long-term goals are those that will be accomplished over ten years. Different time frames for your financial goals will help you plan on spending and stay motivated to achieve them.
3 The next step is to ensure that your financial goals are realistic by giving yourself a target date. For example, if you have a small child heading to university in 15 years, you must have a savings goal spanning over ten years.
Similarly, plan now if you want to travel abroad for your 10th wedding anniversary.
4 Prioritize your financial goals as critical, need, or want. Sometimes when you have to decide where to put your money, you must be sure of what is most important.
For instance, if your short-term goal is an emergency fund, you can set it as critical. However, another short-term goal may be trading in your car, which can be considered a want. Knowing where to put your money becomes even more critical if you have low cash.
5 Lastly, be mindful of how much you have saved compared to what you may still need to save. For instance, do you have any money saved in a 401(k)? If so, note those numbers and categorize them as retirement funds.
It’s essential to have current savings even as you plan for a long-term goal. For example, if you want to buy a house in two years and need a downpayment of $10,000, you can start saving at least $416 per month.
Create A Plan
After deciding on the type of financial goals you need, the next step is to create a plan or budget of how you intend to achieve the goals. A budget is a resource to assist you in managing your finances, not a shackle that prevents you from enjoying life. If you don’t have any money for fun, you’re less likely to stick to your budget, and a good budget is one you’ll stick to.
The next step towards financial awareness is to create a monthly budget of your income vs. expenses. In this way, you’ll know how much money flows into your savings coffers and the amount you spend every month.
A budget book may seem like an old-school option, but it can help you keep track of your savings and expenditure evaluation. It’s also essential to learn how to adopt healthy money-spending habits.
Utilize Online Tools
Several online tools, some more or less automated, create a simple budget. Often the challenge is not creating a budget but implementing the measures, especially if you have many debts.
Write Down A Summary Of Your Expenses
Regarding your spending, it can be helpful to track every expense, big or small, and then categorize them accordingly. This will give you a better idea of which areas you are spending the most money in and where it might be easiest for you to cut back a little to save.
Start by listing all of your expenses, whether fixed or variable. Fixed expenses are regular monthly bills that don’t fluctuate, such as rent or mortgage, credit card, and car payments. On the other hand, variable expenses change from month to month, including groceries, electricity bills, gas, and entertainment.
To make things easier, you can draw an expense table as shown in the table below.
Type of Expenses
Total Cost ( This depends on your actual spending)
Cable TV, Internet, telephone, postage and electricity
School, kindergarten, special occupations, sports
Food and grocery
Payment installments, fuel costs, public transport, minor repairs
Other loan details
Mortgage, car loan, student loan, online loan
Life insurance, health insurance, auto insurance, homeowners insurance, renters insurance
Entertainment, travel, vacation
After drawing up your expense table, add the totals to estimate how much you’re likely to spend every month.
Calculate Budget Surplus/Deficit
Before calculating your budget surplus or deficit, you need to know how much money you have coming in from all your income sources. Remember, your income is the cornerstone of your budget process.
Knowing your net income or what’s left of your total wages or salary once you’ve made deductions for taxes, insurance, and employer-provided programs is critical. Be sure to use your net income when working out your budget, as gross income can give you a false impression of how much money you have available for spending.
If you’re a business person, it’s helpful to have a detailed summary of your contracts so you can better manage your income.
Next, subtract your total monthly expenses from your income and get the difference. If the difference is positive, you’re doing great, and you can save that amount.
Reevaluate Your Budget
After coming up with a budget deficit or surplus, you now need to reevaluate your budget and find out whether it’s meeting your objectives.
If you have a deficit, it means you have an insolvent situation and must relook at the budget by removing some not-so-urgent expenses. Determine whether they are unnecessary expenses on which you can save money by eliminating them.
For example, you can ask yourself the following questions and decide whether you want to cut back on expenses.
1Can you skip a movie night and watch Netflix at home? Of course, you can! Who doesn’t love a good movie night in the comfort of the house, complete with PJs and popcorn?
2 Would you instead take a bus to work instead of fueling your car? Why not! This would save you money on gas and help reduce your carbon footprint.
3Do you need cable TV when you already have an internet connection in your home? Maybe yes or not. Most people pay a monthly fee for whatever they can think of, including cable TV, internet, streaming services, cell phones, periodicals, as well as weight reduction programs.
Once you put one up, you probably won’t give it much thought, yet money is taken out of your account each month. Reevaluate these subscriptions and decide on which one you can do without and whether you need it,
- How can you cut down on electricity bills? Notably, the typical home budget includes 1-3% of its income on electricity depending on the state.For example, if you’re in Alabama, 2.30% of your salary will go towards electricity bills, while in Minnesota, the percentage is 1.60%. Have you considered solar energy? It’s free! You can even get solar rebates and save more! Think about it.
Nonetheless, you can take some energy-saving measures such as not leaving the lights on, not running the dishwasher or washing machine with half a load, hanging out your laundry instead of drying them on the dryer, and running down the thermostat. You can also buy energy-saving appliances for efficiency.
- How can you reduce your living expenses? You can consider getting a roommate and sharing your rent bill if you’re single. Also, think about DIYs instead of calling a handyman for minor repairs. You can also move to a cheaper house within your neighborhood.
Notably, these are just examples of situations that may require revaluation to keep up with your budget demands. It’s important to keep in mind that little things gobble up a sizable portion of your budget. Still, because it’s easy to save on small expenses, how easily you reach your financial goals and achieve a positive or surplus budget depends on them!
Increase your Income
If you’re finding that your budget is often overstretched, you may need to consider ways to increase your income. Asking your employer for a pay hike may probably not be the first thing on your mind right now because it depends on other factors, such as your performance and the company’s growth prospects.
But, you can take up a side hustle to supplement your income and improve your budget. And you’re not alone! According to a study, up to 44% of American citizens survive on side hustles to make ends meet.
Not only that, a side hustle can give you extra income to cover rising costs or help you save for a specific goal. It can also be insurance if you lose your primary source of income. Further, the excess money can clear off the deficit and leave some allowance for savings.
A side hustle can be a great way to make some extra money, but it’s important to know that it can also be a huge responsibility. Even if the job only requires a little time commitment, it can still take all your free time, which you might otherwise use to relax and recharge.
Keep this in mind before taking on a side hustle, and ensure you’re prepared to handle the extra workload.
Learn to Invest
Budgeting entails managing your money properly by having a favorable and stable financial status. When you manage your money well, your income will exceed your expenses, enabling you to invest the surplus and accumulate wealth.
Know Your Investment Options
If you have a large pool of savings, you can invest in assets such as ETFs, real estate, and stocks. If you do it wisely, you can generate additional income through interest or dividends.
Of course, this can only work if you can budget for your money properly by setting priorities, saving, and investing. You also need to know the investments available, how they work, and which ones will meet your needs.
To get a return on your investment, you need to have a plan and strategy in place. This will help ensure that you get your money back and make a profit.
When setting your investment priorities, you must establish your risk tolerance, determined by your age and income. You’ll have plenty of time to recover from losses if you’re young. However, if you are older, invest with caution.
Then master the fundamentals of investing, such as analyzing company stocks and interpreting market conditions and how they will affect your investments.
It’s crucial to gather fundamental data about your financial situation before implementing your investment strategy. It would help if you asked yourself these crucial questions:
- What is the state of your finances at the moment?
- What are your living expenses? Do not forget to list your existing debts and expenses.
- What amount can you put aside for investment?
Now that you have the answers to these questions, you may start your investment journey.
Making money involves taking advantage of opportunities when they arise. However, don’t fall for the promises of making quick money, as there may be some hidden risks that can make you lose your hard-earned money.
Instead, learn how to create wealth gradually. If you’re accustomed to your current salary and suddenly receive a pay increase, this is an excellent time to begin wealth accumulation.
Developing a financial plan is critical for anyone looking to create wealth. You don’t have to go at it alone, hiring a financial planner is an excellent way to get started. While it may be expensive, especially if you’re a beginner, the benefits will outweigh the initial cost down the road.
If you’re worried about affordability, consider using a Robo-advisor, they’re becoming increasingly popular and are much more affordable than traditional financial planners.
Contributing more to your retirement savings is a great way to start, as this will help you down the line. Paying down debt is another good way to free up some extra cash, and finally, increasing your emergency fund savings is a smart move in case something unexpected comes up.
In a nutshell, wealth creation entails:
- Making a budget and sticking to it
- Building an emergency fund
- Automating your finances through online tools
- Managing debt through consolidation
- Maximizing your retirement savings
- Diversifying your investment portfolio and increasing your earnings.
Restock Your Financial Safety Net
Before you create wealth, you must have a hidden reserve in case of financial difficulty. When emergencies knock on your door, you won’t experience financial hardship if your refrigerator fails or you need a new vacuum. If your financial safety net is empty, gradually restock it.
Cut Down On Unnecessary Expenses
Some expenses on which most people spend their money and could live without may include:
- Treat-yourself purchases
- Additional cleaning supplies
- Coffee outings
- Video games
- Bath & Body candles
- Candy, energy drinks, and games in the checkout line
- Pricey cars
- Toys for kids
- Home improvement buys.
Impulse purchases can be enjoyable at the moment, but they can also be costly budget-busters. You go into Walmart to get cleaning detergents, and within a blink of an eye, your cart is full of incredible throw pillows. This is completely normal because, according to statistics, Americans spend an average of $314 per month on whim purchases.
Consider this: $3768 annually is enough to invest in a life insurance policy with cash value benefits. With this in mind, it’s time to cut down on unnecessary expenses.
Utilize the 28/36 Expenses Rule
One way to cut down on unnecessary expenses is to apply the 28/36 rules on expenses. According to the 28/36 rule, household expenses shouldn’t make up more than 28% of your gross income. On the other hand, loan repayments shouldn’t be more than 36% of your income. Since not everything is strictly scheduled, this gives you some flexibility in the monthly budget.
Know Your Spending Habits
Unexpected costs will send you into a tailspin if too much of your money is invested in them. Knowing your spending habits will make it easier to decide what you need to cut back, save, or still afford.
It all goes back to the subject of budgeting, and the kicker is, stick to it!
A budget won’t automatically fix all your financial problems, but it is a helpful tool for managing your spending. If you don’t already have it budgeted for, refrain from spending. It would be best to be proactive about spending your money and then hold yourself accountable to that plan.
It doesn’t have to be complicated; sometimes, the simplest solution is the best. You can do this!
Next, set priorities and compare your expenses accordingly. As noted, impulse buying is one of the biggest traps you can fall into, but there is a way to avoid it. If you take the time to figure out ahead of time what items you want to buy and how much you’re willing to spend on them, you can avoid the temptation of buying things you don’t need.
For instance, how much do you spend on entertainment or food? Are you an average spender, or do you spend more money than others? Using your reference budget, can you evaluate your spending in relation to other households with similar incomes? This is how you determine how much you can save reasonably.
One way to be mindful of your spending is by comparing expenses and shopping for the best product and service prices. By doing this, you can make the most of your money.
Whenever possible, look for discounts on products, coupons, or affordable alternatives to avoid overspending on things you don’t need.
Set Money Aside For Huge Expenses
If you have huge expenses such as financing to buy a new car or mortgage, you need sufficient funds to avoid putting yourself at tremendous risk in the future. Start by putting aside money for your contribution to the project because lenders may require a certain percentage to close the deal. In this way, you realize the extent of the purchase decision. Also, give the decision some thought.
Pay Off Existing Debts
Most people fall into a costly debt trap by having multiple loan facilities and credit cards. Indeed, a report suggests that most American households are falling into debt. Whereas debts are not necessarily bad, they are associated with unsustainable lifestyles if not put to correct use. They can put you under unnecessary pressure and financial instability.
Pay Off Credit Card Debts
Generally, the smartest and safest investment is paying off many credit card debts or consolidating existing ones.
Credit cards can be quite a temptation for most people. It’s so easy to whip out the plastic card when we’re in a bind and need cash without really thinking about whether you can pay off the balance at the end of the month.
Your credit card debt is manageable with careful planning, thrifty spending, adherence to due dates, and consolidation. Another approach to control credit card debt is ensuring you follow the 30% credit utilization criteria for your limit.
Consolidate Existing Debts
If you already have too many loan installments to handle, talk to your lender about consolidating your debt. Luckily these days, you can seek loan approvals online without filling out any forms or making multiple trips to the lender.
If possible, spread out these costs over a long period in affordable installments to avoid budgetary bumps in the road.
Pay Utilities on Time
Making timely payments on your expenses can help you reduce your debt. Set up recurring reminders for important bills like electricity, cable TV, internet, and postage. Some businesses provide discounts to customers who pay their bills on time. Furthermore, closing troublesome accounts that may accrue fees can provide some relief.
Ultimately, by knowing when your bills are due and making it a habit to pay them on time, you can relieve stress, improve your credit score, save some money and enjoy lower-interest loans in the future.
Improve Your Credit Score
There are several things you can do to improve your credit score. Building your credit file is one way. This means making payments on time and catching up with any overdue accounts. You should also pay down balances on revolving accounts and limit opening new ones.
When your monthly or weekly income hits your account, there are two options on the table. Spend it all or make sure there is some money left over to save, invest, and grow. This is the foundation of financial independence, which you can attain with tiny savings. Ideally, spend far less than you earn and either save or invest the surplus profitably.
A budget makes it easier to keep track of actual spending and identify areas where money can be saved. Overall, it enables you to formulate a spending plan for your money and ensures that you always have sufficient funds to purchase the items you need and save the balance. Maintaining a budget will help you stay out of debt or work your way out of debt if you are already in debt.