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Budgeting is a crucial component of financial planning, and it's never too late to start. Here are some budgeting tips to help you manage your finances and plan for the future.
Track your spending
Tracking your spending is an excellent way to get a handle on where your money is going. To get started, consider using a spreadsheet or tracking tool. Reviewing bank statements and card transaction history is a great way to take inventory of spending on a weekly or monthly basis. Having a better understanding of your most frequent and significant expenses can encourage more mindful spending habits, and ultimately boost your bank account.
Create a budget
Creating a budget is the next step in taking control of your finances. Organize your expenses by category, such as housing, transportation and entertainment. From there, prioritize these categories with essential items first, such as groceries and utilities. Next, allocate a portion of your income to each category - this will represent your limit for spending in each on a monthly basis. It is important to be realistic with your budget, and track it each week to ensure you are on track. A portion of your budget should also be allocated towards savings, especially if you are working toward building an emergency fund.
So how do you allocate your budget once you’ve sorted through your expenses and assigned categories? One method you may find helpful is the 50/30/20 Rule
Using the 50/30/20 rule is an excellent way to ensure you are allocating your funds to the right categories. Here’s how it works: start by allocating 50% of your budget towards “needs” such as groceries, utilities, transportation and healthcare. Next, use 30% for “wants” or non-essential lifestyle choices like entertainment, travel, and hobbies. The next 20% of your income should be allocated toward savings, investments, and debt repayment. This category might include adding to an emergency fund, saving for retirement, or paying down debt. Using this framework, you’ll find a balance between meeting your needs, enjoying your wants, and prioritizing future goals.
Cut expenses
If you have a surplus or deficit in any category at the end of the month, you may need to make adjustments to your budget going forward. Are you overspending on your non-essential categories, like shopping or dining out? Did you discover some unused subscriptions or services that could be canceled? Budgeting will be an ongoing, learning process where you will likely discover new opportunities to save as you go. A dedicated financial planner at Domain Money can also help you negotiate bills, such as cable and internet. We’ll make sure you are getting the best deal and negotiate on your behalf.
Automate your savings
Automating your savings is an excellent way to ensure that you're saving consistently. You can set up automatic transfers from your checking account to a savings account or retirement account each month. You can also set up automatic contributions to your employer-sponsored retirement plan, such as a 401(k).
By automating your savings, you don't have to think about it, and you'll be less likely to spend the money on discretionary expenses. This can help you reach your financial goals, such as building an emergency fund or saving for a down payment on a home.
Pay off debt
Paying off debt is crucial to building wealth. Start by making a list of all your outstanding liabilities, noting the interest rate, minimum payment, and loan structures for each. Consider paying off consumer debt first (i.e. credit card debt or personal loans), as the interest is typically highest and not tax-deductible. Continue by prioritizing based on the highest interest rate, and understand that interest on certain loans is tax deductible. For example, it may be beneficial to prioritize paying off an auto loan before a mortgage, as your mortgage interest may be deductible on your tax return.
Using the “snowball” or “avalanche” method to pay off your debts is another strategy to consider. With the debt snowball method, you focus on paying off your smallest debt first, then move on to the next smallest debt. With the debt avalanche method, you focus on paying off the debt with the highest interest rate first, then move on to the next highest interest rate debt.
Plan for retirement
It's never too early to start planning for retirement. Consider opening a retirement account, such as a 401(k) or IRA, and start contributing to it regularly. If your employer offers a matching contribution, be sure to take advantage of it.
To make planning for retirement easier, use a retirement calculator to estimate how much you'll need to save to reach your retirement goals. This can help you see how much you need to contribute each month and adjust your budget accordingly.
Build an emergency fund
An emergency fund is an essential component of any financial plan. It can provide a safety net in case of unexpected expenses or job loss. Start by setting aside a portion of your income each month into a conservative investment, such as a high-yield savings account or money market fund. Avoid commingling your emergency fund with cash used to pay your routine expenses. By keeping this account separate, you won’t accidentally spend money that was meant for your emergency fund. Aim to accumulate three to six months of expenses in your emergency fund. To make building an emergency fund easier, consider setting up automatic transfers from your checking account.
Get started today
Budgeting plays a vital role in effective financial planning, and the great news is that it’s never too late to begin! Using the steps we have outlined, you’ll be on your way to efficiently managing your finances and preparing for a brighter future. A financial advisor can help you take a holistic approach to your budgeting needs. A financial expert at Domain Money will consider what is most important to you, and help set you on a path toward financial well-being.
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