Good spending habits reduce stress, provide control over finances, and build solid credit. So why do so many people avoid actively managing their credit? Because budgeting, like dieting, implies depriving ourselves of what is fun in life.
So get rid of the word "budget" — it carries too many negative connotations. Coming up with a different name, and more importantly a different attitude, will get you off to the right start mentally. Let's use the term "spending plan" instead of "budget."
A spending plan is about gathering information, finding out what your financial habits are, and then making wise choices for the future.
Keep it Simple
Successful spending plans are simple and easy to manage. Many people try to establish complex, time-consuming plans that they end up abandoning in frustration.
To ensure success, keep your spending plan simple. Start by making a list of your monthly expenses. Find an easy way to create and maintain a list. If using a computer is second nature to you, by all means create your list on it. If you're more of the paper and pencil type, use them instead. Use the method that best suits you.
My Financial Road Map is a document NELA® created to help you monitor your spending and develop a spending plan. Download My Financial Road Map.
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Prioritize
List the items on your plan in order of importance to you. Basic living needs — such as rent, food and utilities — should be more important than entertainment or other optional items.
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Plan Ahead
Plan ahead for any big expenses due in the future. Be prepared for auto insurance, vacations or upcoming holidays. Break annual payments into monthly amounts and put that amount into a savings account every month.
For example, your car insurance costs $350 a year. Divide $350 by 12 months and plan to save $30 each month. When your insurance is due, you'll have $350 to pay your bill without having to tap into savings or credit.
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Prepare for Emergencies
Plan ahead for emergencies such as car trouble and medical expenses. We obviously don't know when emergencies are going to happen, but we do know that they will. These unpleasant events will cost you money, especially if you've done little to prepare for the unexpected.
How Much Should You Save for Emergencies?
Ideally, you should have an amount equal to six months of your basic expenses put away in an emergency fund. That's tough for most people to do. But don't let the challenge of that goal stop you from getting started.
One way to begin an emergency fund is to review the last year and see how much you've spent on emergencies. For example, if over the last 12 months you spent $500 on various car repairs, you know that is an average of $42 per month. By putting $42 a month into a savings account, you'll start building an emergency fund.
You still may not accumulate enough to cover all emergencies, but you'll be in a better position financially to manage the expenses without maxing out your credit cards.
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Track Spending
If you're unsure of what your expenses are, especially in areas like food and entertainment, you may want to track your spending. Carry an index card or notepad with you and write down how you spend your money. Or use an online budgeting application to easily track and categorize all your spending.
Monitor your spending for a month. At the end of the month, you'll have a clear picture of where your money goes. Another method is to get receipts for everything you buy. Transfer this information onto a calendar at the end of each day.
We created the Spending Tracker to help you monitor what you spend your money on each day. Download the Spending Tracker.
Compare your spending habits to your priorities. Are you spending money on the important things in your life? You may be letting money slip through your fingers without even realizing it.
Let's say you buy your lunch each day at school or work. If the average amount you spend is $6, you're spending $30 a week, $120 a month or $1,440 per year on lunch. Making your own lunch could save you money and allow you to cover other expenses. Consider how you could use that $6 per day to reduce or eliminate your debt.
Tracking your spending and comparing it to your priorities will help you identify what spending habits you need to change.
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It Doesn't Always Add Up
If you're spending more money than you earn, you're heading for trouble. You have three major options:
- Cut your expenses.
- Raise your income.
- A combination of both.
Cut Your Expenses
Analyze your spending and look at where you can reasonably make some cuts. You may have to make sacrifices like cutting your cable service, eating out less or forgoing the purchase of a sport-utility vehicle. Making these choices isn't fun, but it may save you from financial troubles.
Raise Your Income
Raising your income is another option. Is it time to look for a higher-paying full-time job? Can you pick up extra hours at your current job? Are you able to work part-time on the weekends or during the week? Examine your options.
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