If you want to manage your expenses and build financial freedom, start by creating a budget. Unfortunately, many people do not create a budget: 73% of Americans do not have a budget that they use regularly, according to a survey conducted by the lending platform OppLoans in 2022.
As a result, it is easy to feel that your money controls you rather than you effectively managing your money. If you belong to this category, you may benefit from learning some basics of financial planning, including how to use technology, choose a budgeting system that works for you, and eliminate bad financial habits.
Find a Budgeting System that Works for You
Kate Miller, program director at the Financial Counseling and Planning Association, suggests finding a budgeting system that suits you. “Remember that your budget is your budget – it’s not your neighbor’s, best friend’s, or coworker’s. You have to do what works for you financially,” Miller said.
You can try a variety of budgeting systems, including the pay yourself first system, zero-based budgeting, envelope budgeting, or following the 50/30/20 rule. For example, the 50/30/20 rule is a popular budgeting method. The 50/30/20 rule was created by Senator Elizabeth Warren and became popular through her book “All Your Worth: The Ultimate Lifetime Money Plan.”
This rule involves dividing your expenses into three categories: fixed expenses, discretionary expenses, and savings. This strategy can be helpful for anyone new to budgeting.
For instance, if you earn $5,000 a month, the percentages would be as follows:
- 50%: $2,500 for fixed expenses such as housing, groceries, and fuel
- 30%: $1,500 for discretionary expenses such as dining out or going to the movies
- 20%: $1,000 for savings
Leverage Technology
According to financial planner Brian Walsh, senior director of financial planning at personal finance company SoFi, leveraging technology can help you adopt better financial habits. The right tools help save money and manage spending habits. For example, automatically saving a portion of your monthly income is an excellent way to ensure that savings are made consistently.
Immerse yourself in learning more about personal finance and budgeting basics through online blogs, articles, podcasts, and media. “Financial literacy is subject to decay, and if you don’t use it, you will lose it,” Walsh said in an email interview with The Balance.
When it comes to tracking your money, there are many technological tools that can help you. While you can use pen and paper with traditional methods, you can do the calculations faster using Excel spreadsheets or Google Sheets, or by downloading a budgeting app. Intuit Mint and You Need a Budget (YNAB) are popular budgeting apps to try. Both apps help set financial goals, craft a budget, and track monthly spending.
No matter which method you use for budgeting, the common recommendation is to try to save 20% of your income each month.
Track Your Progress
Creating a budget is just the first step toward improving your financial situation – you also need to track your budget throughout the month. Miller recommended tracking your budget daily and reflecting on it weekly.
Reviewing the budget daily ensures that each transaction is settled at the correct amount. At the end of the week, when reflecting on your budget, think about what you spent and how you felt when you spent that money, according to Miller.
It can be difficult to avoid unplanned expenses at times, according to Miller, but she added: “Did you cope with stress by eating out or shopping for some comfort?” Your emotions can often derail your budget.
She admitted
Militz finds tracking a budget boring. “Yes, tracking is boring – I won’t lie, I hate it – but it increases my awareness. At the end of each week, I look back and identify what went right and what I could do better.”
Eliminating One Bad Habit
According to Walsh, most people have at least one spending habit that holds them back financially. He recommended eliminating that habit for a certain period and putting the unspent money into a savings account.
For example, let’s say you spend a lot of money eating out each month. Commit to cutting that item from your budget and directing the money that was allocated for dining out into a separate savings account.
Don’t Try to Do Everything
Walsh warned readers against trying to do everything at once. “Often, people get excited about improving their financial situation and want to do everything in a short period,” he said. “Not only is that impossible, but it causes people to fail.”
He recommended picking one achievable goal and committing to it for 30, 60, or 90 days. Once that goal is achieved, move on to the next financial goal. For example, your first goal could be to save $1,000 for your emergency fund. After achieving that goal, work on saving three to six months’ worth of expenses.
Frequently Asked Questions (FAQs)
What is a budget?
A budget helps track the money you spend and receive each month, ensuring you have a plan for saving and covering your monthly expenses. However, creating a budget is just the first step. You also need to track your budget throughout the month to get a realistic picture of where your actual finances stand. This can help you identify areas where overspending occurs.
What is a budgeting app?
A budgeting app is software for your computer or mobile device, with features varying depending on the app you use. Most budgeting apps allow you to create a monthly budget and may even sync with your bank accounts and credit cards to reconcile your transactions. Some apps may also track your savings, debt payments, and investments.
What is financial wellness?
Financial wellness is a state of financial security that gives you the ability to make decisions about your current and future financial situation. Financial wellness can provide you with:
- Control over your daily and monthly expenses
- Easier management of a financial emergency
- Achievement of your financial goals, such as retirement or buying a home
- The freedom to make financial decisions that work for you
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Sources:
Opportunity Financial. “Study: More Than One in Four Americans Say Their Debt Is Unmanageable.”
U.S. Senate. “Books Written by Sitting Senators.”
Yale University. “Budgeting and Goal Setting.”
Source: https://www.thebalancemoney.com/managing-money-budget-basics-1289559
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