Consumer News: Financial Literacy- 3 Simple Steps
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New to Budgeting? Get Started with Three Simple Steps
About 58% of people report that they feel comfortable creating a personal budget. We want to help that number reach 100%! Everyone can benefit from using a budget, no matter your financial circumstances. Using a monthly budget will help you jumpstart your savings, pay off debt more quickly and make progress toward your financial goals. Ready to make your budget? Follow these three steps to get started:
Step 1: Determine income and expenses.
The first step to any budget is to evaluate income versus expenses. It’s time to examine your spending habits with a fine-toothed comb. What are your essential expenses that recur and are expected each month? Think rent, utilities, groceries, insurance, and payments on loans or other debt. Now, assess your discretionary spending. Are there any areas where you could reduce or eliminate an expense? Some things that often fly under the radar are subscription services, memberships we don’t use as often as we think, frequent dining out, and other forms of entertainment. Another sneaky cost that can add up? Late fees on missed payments. By planning ahead for the budgeted expenses on your calendar, your budget can help you manage the flow of money to minimize or even eliminate late fees.
Once you’ve calculated money in versus money out, you’ll have an idea of how you’re currently operating. Then, you can decide if any adjustments to your spending patterns are needed to meet your individual financial goals.
Step 2: Choose a budgeting plan.
Armed with the information about your financial habits, you can create a budgeting plan that works for you. These are the two most popular budgeting methods:
- Zero-based budget: Also called the envelope method or zero-sum budget, this strategy is simple: give every dollar a job. You designate all income for specific spending categories — rent, utilities, groceries, insurance, healthcare, debt payments, entertainment, etc. — making sure your income minus expenditures equals zero at the end of the month. This method can help you resist the temptation to overspend, since each amount is preplanned, and allows you to visualize your spending clearly. It’s also one of the best ways to pay down debt quickly and meet savings goals. However, this strategy can feel a bit too constraining for the free spirits out there who still want some flexibility and may not work for every lifestyle.
- 50/30/20 plan: With this classic strategy, you allot your income in larger batches, which allows for a bit more flexibility on the details throughout the month — 50% for essentials, 30% for discretionary wants and 20% for savings and debt. This plan can be an excellent option for getting you in the savings mindset without being stifling, since you still get to spend a third on the fun things in life. For an extra boost to tackle debt more quickly, you can swap the “wants” with “savings and debt” categories, spending only 20% on wants and instead putting that extra 10% toward paying down debt.
There are several other budgeting strategies out there too. We’re happy with whichever method you pick if it allows you to budget in a way that fits your life and your financial goals. The most important thing is sticking to the budget and adapting it as needed to fit your life.
Step 3: Put saving on auto pilot.
Among the best things you can do for your current and future self is automating your savings. The simplest way is to take a set percentage out of each paycheck, so you don’t miss it. Well, maybe you’ll miss it a bit at first, but since you’ve planned to save in your budget, it’ll get easier over time. You’ll want to begin saving as soon as possible so the money can have time to potentially grow because time is your biggest ally when it comes to saving a nest-egg.
Why should you budget?
If you’re having trouble committing to a budget, don’t be discouraged. The transition from freeform spending to budgeting does take some getting used to, but we encourage you that it’ll be worthwhile. By sticking to your budget, you’ll be able to reach financial goals faster and feel more confident in your purchasing decisions.
Need a little help tracking spending? Try a Budgets tracker where you can create personalized budgets for each of your accounts and watch where your money is going, whether you’re spending it on food or gas or birthday shopping.
For more information visit Grow Financial to find out how you can save and how you can become a member today!