46% of adults in the United States would not be able to cover a $400 emergency expense without borrowing money or selling something. If this sounds like you, it’s not too late to take control of your finances and remove this source of stress from your life.
One of the best ways to do this? Through a budget. Taking the time to prepare a budget can help you see where your money is going so you can then see where you can cut costs and meet your financial goals.
Ready to learn how to get your finances under control? Let’s get started.
Why You Need to Start Saving
Approximately 21% of Americans don’t have a savings account. And around 62% have less than $1000 in their savings accounts.
The problem with this? We never know what’s around the corner in our lives. It’s crucial that you have an emergency cushion to pay for out-of-pocket medical expenses, car repairs, sudden loss of income, or any other unexpected expenses. Otherwise, you’ll end up going into debt to pay for these things when they happen and will pay interest on any loans or credit cards you use.
When you prepare a budget, you’re protecting yourself from the stress and anxiety associated with these unexpected expenses.
Imagine, for instance, you wake up in the middle of the night in excruciating pain. It feels like a hot poker is lying on your face and you can’t eat. After a trip to your dentist, you’re told you need an emergency root canal. In the United States, this can range from $300 to $2000. Would you be able to afford this?
Another thing to consider? Retirement. When you’re young and feel like you’re already getting by, it may seem like there’s little point in saving for retirement- especially when it’s so far away. But saving for retirement young can be the difference between retiring comfortably and barely getting by when you’re older.
As public health and medicine continue to make massive advances, people are living for longer. That means that you can expect to need more money to get you through your twilight years. Social security is also hugely volatile and should be used as a supplement to your retirement income, and not your primary source of income.
How to Prepare a Budget
You may associate budgets with people who recently lost their jobs and never get to have fun anymore. But the truth is, budgets should be used all the time- and not just when times are tough.
When you prepare a budget for your everyday life, you can minimize your stress and attain your goals. Sure, a budget isn’t a sexy strategy or a flashy tactic, but it’s a way to design the lifestyle and future you want to have.
Here’s how you can prepare a budget that still allows you to still enjoy yourself while preparing for the future:
Understand Where Your Money Goes
Before you prepare a budget, you need to know what you’re spending your money on every week. If you’re the type of person that doesn’t like to check their bank accounts often, you’ll need to change this.
Don’t be surprised if you feel some mental resistance at this stage. When your finances aren’t where you want them to be, it’s natural to avoid the things that make you feel bad or uncomfortable. But before you can get your finances in order, you need to have a detailed list of your incomings and outgoings.
Grab a pen and paper (or use a tool like Google Sheets) and write down how much money you make each month. Next, write down all of your expenses and bills. These include:
- Mortgage or rent
- Student loan repayments
- Car loans
- Other loans or credit card debt
- IRA contributions
- Any other payments that come out of your account e.g. Netflix, Spotify, gym memberships etc
- Additional debt payments, savings, or investments
Track Your Spending
Grab a notebook or use your phone to track every single cent you spend for a week. This includes expenses like gas for your car, eating out, groceries, coffee, and more.
This can be a huge wakeup call if you’re the type to swipe your card without thinking about the money you’re spending. If you use an app, you can see where the rest of your money is going after you pay your necessities. That way, you can easily spot ways you can cut down your spending.
Set Your Goals
Now it’s time to consider your priorities. Right down a list of goals and work out where you’d like to be in the next one, five, and ten years. Compare these goals and priorities to your spending habits. Do they easily match up, or is it easy to see huge discrepancies between your goals and the way you spend?
If you see any areas where your spending is massively out of line with your future goals, you’ll be able to easily fix them when you prepare a budget that directs more of your current income to your goals.
Remember: This isn’t just about putting your money where experts tell you to. When your behavior isn’t reflecting your ideals and goals, it creates stress. This is known as cognitive dissonance and it can have a negative effect on your happiness.
Make Some Cuts
Once you’ve spotted the places where your spending doesn’t match your goals, you can see where you can cut the fat. Maybe you don’t need those monthly gym fees if you never work out. Or perhaps you could switch to running or use free YouTube videos to workout at home.
You may find that you’re buying lunch for work every day. You can save thousands of dollars each year by preparing lunch at home and taking it with you. Try cutting back slowly- bring your lunch one day a week and slowly increase this over the course of the month. This is also hugely beneficial to your health and you can put that money straight into your savings account.
When you prepare a budget, it’s important to think about your day to day life and whether you’ll actually stick to that budget. Cutting out all of your favorite things is unlikely to work since you’ll quickly become demotivated and revert to your old habits. Instead, consider which things you won’t miss if you cut them out, and which things can be switched to an alternative.
For example, it may be worth getting a simple coffee maker or french press at home and taking your coffee to work with you. A cheap milk frother can help you make fancy lattes at a fraction of the price of what you’d pay for Starbucks or Costa. Switching from your weekly dinner out to a potluck dinner in can actually be more fun and allow you to have a proper catch up with your friends- without the big bill at the end.
Create Your Budget
Now it’s time to actually prepare a budget. The best way to do this is to put your money on autopilot. That means setting up automated systems to invest and manage your money.
This means that you never need to worry about whether you’ve paid the electric bill. It also means that you’re protected from yourself. It’s much harder to sabotage yourself when everything is automatically deducted from your account.
Set up all your bills so they come out automatically. If possible, ensure that this happens the day after your wages or salary hit your account. That way, you won’t see the money in your account and be tempted to spend it.
Once your expenses have been deducted, you also need to be transferring money to your savings. This is called “paying yourself first.” Often, people think they don’t have enough money to save since they’re spending all their money before their next payday. But you actually need to do this in reverse. Based on your financial goals, decide how much you’d like to contribute to your savings each month. You’ll also need to contribute to long-term savings for retirement, such as your IRA.
Once your bills are paid and you’ve transferred money to your savings, the rest of your money is for you to play with. You can spend this on clothes, clubbing, dinners out, coffee, brunch with friends, and anything else you like.
The idea of creating a budget may sound like a giant fun killer. But it is possible to enjoy your day-to-day life while still meeting your financial goals.
By setting goals, looking for ways to cut out extra spending, and automating your finances, you can more easily save. And this means you can spend the rest of your money guilt-free, while still meeting your short-term and long-term goals.
What are you waiting for? Prepare a budget today or check out some of our top blog posts to help you manage your finances.