Budgeting 101 : How to Budget Like an Expert

How to budget like an expert

The majority of people do not want to hear the word budgeting because it means they can’t spend their money the way they want to. However, if you have financial goals, whether it’s to retire in comfort, buy a house or become debt free, budgeting is the only way you are going to meet those goals.

Budgeting means working out how much money you are going to spend on your living expenses and sticking to that decision. It’s easy to learn about the basics of budgeting, but it’s difficult to stick to a budget.

However, if you want to enjoy your retirement, it is essential that you stick to a budget. It is your responsibility to stick to the budget because it is impossible for the budget to do that for you. Here are some tips on how to budget like an expert and how can budgeting help your current financial situation.

Why Are the Majority of Americans in Debt?

Source: CNBC.com

Have you ever wondered why it’s impossible to retire at 45, and until you reach that age still go out to eat every day, live in fancy house with a huge mortgage and lease a Mercedes Benz. After all, that’s how the neighbors are living, their house is even bigger than yours, their car is top of the range, they wear designer clothes, have a boat, send their kids to private schools and don’t appear to be struggling. Maybe they are not, and they’ve just got more money than you.

Or, maybe they aren’t doing nearly as well as you think, and are drowning in debt in exactly the same way that you are.

It’s also important to remember that it’s more than possible to live extremely well without having enough money to do so. You can lease a nice car, get a mortgage on a luxury home on a fifty-year mortgage; you can take out a loan to pay for your children’s college education, take vacations, buy boats, buy clothes and eat in expensive restaurants using credit cards and slowly pay the money back.

When your credit cards have almost reached the limit, you can take out a loan on your home to pay them off, or you can get a new credit card. The majority of Americans live on borrowed money; but eventually, the debt will catch up with you. Don’t allow your neighbors, coworkers or the media to entice you to keep spending money you can’t afford. You’ve got to decide what’s important to you.

What Isn’t a Budget?

The majority of people know what a budget is, but most people are unaware of what a budget isn’t. First, it is not a straitjacket that prevents you from enjoying your life, it’s actually the opposite of this and eventually, it will give you the financial freedom you need to live the life of your dreams.

It is definitely difficult to live according to a budget, especially if you are used to spending as you wish. However, it is also important to remember that it is even more difficult to be in debt, to live from paycheck to paycheck and to worry about how you are going to pay your bills on time.

What isnt a budget

You’ve already experienced what it means to live a hard life where financial insecurity is the norm for you. Even though there is no fun living according to a budget, it is no way near as difficult as living with an empty bank account.

It is also important to remember that establishing a budget is not the only answer to your financial difficulties, you need to become financially literate so that once you’ve achieved your goals, you don’t revert back to old habits.

What Are Your Overall Financial Goals?

One of the keys to effective budgeting is to have an understanding of your financial goals. If you don’t know where you are going, you will find it very difficult to get there. Therefore, the first question you should ask yourself is what do you want to achieve?

Set your financial goals

Do you want to be debt free, buy a new house or save for a vacation? You will also need to consider whether you are going to budget with your spouse. Whatever goals you might have, write them down and post them somewhere you will see them each day so that you are constantly reminded of what you want to achieve.

Be Realistic

When it comes to creating a budgeting plan, you can’t just start throwing out numbers. It is important that you are realistic when it comes to setting a budget for yourself. For example, if you decide that you are going to cut your food budget down from $500 to $200, you will need to go out and do some research to find out how this is possible.

If not, you will fail in the first week. Therefore your first step should be to ask yourself, what are your financial goals? Why do you want to achieve financial freedom?

Evaluate your current situation and decide where you are willing to make cuts. For example, you might spend $5 on a Starbucks coffee and donut every morning. You can cut down on this expense by making your own coffee and buying a packet of donuts from the grocery store instead.

You will also need to think about what your monthly budget will be and how you can achieve zero-based budgeting.

Pay Attention to Your Cashflow

Your first step in creating a budget is knowing exactly how much money you’ve got coming in and to track spending. There are a lot of people who have no idea how much money is coming in and leaving their accounts every month. Your goal should be to have a positive cash flow, this means that you are making more money than you are spending.

Sit down and write out all of your monthly expenses such as housing expenses, car payments, food, debt payments, and insurance premiums.

Add to Your 401k

If you’ve got a 401k or any other retirement plan, you should set up a contribution rate as soon as possible. Some companies offer to match your contributions; if this is the case, make sure the deferral rate is high enough so that you are able to score the free money.

Even if you can only afford to contribute two percent of your salary, at least you are contributing something. Because the money is taken out of your paycheck automatically before taxes, you won’t find it too difficult to live without it.

Put the Balance in Your Checking Account

After paying your 401k contribution and any other benefits that you pay for pretax, put the remaining money into your checking account.

Set up Automatic Bill Payments

All your fixed monthly costs should come out of your checking account by an automatic transfer. This should include things such as mortgage/rent payments, car payments, utilities, credit card payments, gym membership or student loan payments.

Any payments that has a due date should come out of your account automatically. If you are able to pay for any bills using a rewards credit card without having to pay an additional fee, that would be more financially viable than having the money come out of your checking account. If you choose this option, give the company you are paying your credit card details.

It is also important to pay your credit card in full each month because this is one of the most important factors that have an effect on your credit score.

Pay off High-Interest Debt First

Financial experts recommend that you pay off debts with the highest interest rates first before you start investing or saving. The reason for this is that a car loan or a credit card with an interest rate of more than seven percent will typically cost you more in interest payments then you would if you could earn if you invested in the stock market.

Pay at least the minimum balance on any consumer debts, if you can afford to pay more, then do so. You should view consumer debts as an expense and have an automatic transfer set up from your checking account once a month. You can also call up your creditors and set up a debt repayment plan.

Stop Spending

If you want to know how you can make it easier to achieve budgeting success, there are two method of budgeting to free up money to achieve your financial goals; either spend less money, or make more money. However, one of them is better than the other. If twenty two percent of your income goes to federal and state taxes, then you only have 78 cents remaining out of every dollar earned to save for the future and pay off debts.

Control your spending

However, if you are able to save a dollar out of your expenses, you can contribute all of it to your debt, investments and savings. You also need to think about what are your reasons of overspend? If you are going to stop spending, the key is to buy the things you need and not what you want.

Automatic Savings Payments

The next step is to set up automate savings from your checking account into your savings account. You should also think about your savings goals; and how much you want to save in a certain time frame. It is also advised that you set up a high yield savings account.

The money you are saving in this account should be goal specific; for example, you are saving for a wedding, a vacation or a deposit for a house. Saving money should be one of your high priority goals, even if you save $20 a month until all your high interest debts are paid off.

It will make it easier to keep track of your money by using multiple bank accounts. You can keep them at the same bank, but they should all have different labels.

Save or Spend What’s Left in Your Checking Account

By this stage, all of your payments are automated, since things such as incidentals and groceries are not fixed expenses, use the rest of the money in your checking account to cover these costs. If you find that you are spending more than you are earning, find a way to cut down on your expenses.

IRA Investment

If you have additional money left over after all your expenses have been covered, you might want to think about opening an IRA account to save more for retirement. You can open an IRA account at the majority of financial institutions and all money is contributed after taxes and kept in a holding account where you can purchase investments such as mutual funds, stocks or bonds.

There are two types of IRAs and their main differences are in tax treatments. Taxes are deducted from contributions made into a traditional IRA. This is not the case with a ROTH IRA. Every year that you contribute to an IRA, you can deduct from your tax return which reduces your overall tax bill.

However, when you take out money after the age of 59 and a half, those funds are taxed as ordinary income.

Other Income and Assets

Income is any money that you are paid and will continue to get paid in the near future. Your paycheck is an income, but the wages you receive from your employer is not the only income you are limited to. You may also get child support, self-employed income, a social security check, a welfare check, rental income from houses you own or disability payments.

Any money you receive that you can depend on is considered an income. It is also important to mention that you can only consider money as an income if you can rely on it. If you are not sure that you are going to receive the money every month, it’s not an income.

Once you have worked out exactly how much income you’ve got coming in, you can start planning your budget.

Get Professional Help

While the majority of people are well and able to take care of their money, you might also want to think about seeking advice from a financial advisor. Some people find it difficult to keep track of multiple financial goals, run a business, set up a retirement savings plan or get out of debt.

A good financial advisor will help you organize your finances in a way that is easy to manage, plus give you advice on the most lucrative investments to make.

Get help from professional

Final Thought

Now that you understand how to budget and the benefits of budgeting, it’s essential that you put the knowledge you have learnt into practice. Retirement is supposed to be a time to relax and enjoy the end of your days.

If you are nearing retirement, it is essential that you get your finances in order and establish healthy budgeting habits so that you can retire in peace without having to worry about money.