If you’re living from paycheck to paycheck or your finances are feeling pinched, it’s a good indicator that it’s time to take control of your finances. One of the most important steps to doing that is to take a good hard look at the money you have coming in versus the money you have going out, so that you can establish a solid budget — and stick to it. But you shouldn’t stop there, you also need to pay yourself and build a cushion for emergencies. Sound impossible? Try these 5 steps to get started:
1. Evaluate your income. How much money do you have coming in? Including your paycheck is a given, but don’t forget other income: A second job, alimony, child support, or any other miscellaneous cash that you might have coming in. Write it all down and add it up.
2. Calculate your expenses. One of the most difficult steps in establishing a budget is determining how much money you’re spending – how much money is going out. First make a list of all your fixed expenses. This would include rent, mortgage payments, car payments, insurance, utilities, cable, etc. Next, include variable expenses such as food, gas, entertainment, etc. And lastly, don’t forget about miscellaneous and maintenance expenses like property taxes, car maintenance, tag renewals, birthday gifts, etc. Once you’ve added up your out-going monthly expenses, subtract them from your income and that’ll tell you whether or not you’re spending more than you earn, and help you get a better idea of where you can cut back.
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3. Trim the fat. Now that you’ve gotten the hard part out of the way, it’s time to look at where you can cut back. If you’re spending $60 a month at the local coffee shop for your daily double mocha lattes, consider only splurging once a week and switching to coffee at home. One way to easily determine areas that you may be able to cut costs is to evaluate which expenses are actual ‘needs’ versus ‘wants’ or ‘nice to haves.’ This can add a whole new perspective to your budgeting efforts and give you the extra push you need to cut the expenses that aren’t necessarily ‘needs.’
4. Pay yourself. In today’s economic environment it’s more important than ever to have a financial cushion for emergencies. Don’t forget to leave room to pay yourself. Setting aside enough money for savings or an emergency fund can make all the difference in the world when you’re blindsided with an unexpected job loss or financial emergency. Ideally, you should aim to have at least 3-6 months salary in your emergency fund, but even having $1,000 as a backup is better than no backup at all. If you’re struggling and can only afford a little each week, setting aside even $10 a week is better than nothing.
5. Stick to it. So you’ve established a solid budget and have a great plan in place – but how do you stick to it? It’ll take some dedication on your part, but the reward is well worth the effort. If you have a spouse, work together to hold each other accountable for any spending oversights. If one of you overspends, set rules that the guilty party has to contribute more to that month’s savings fund – a sort of quarter jar method with a twist. It’s much easier to do when you’re working at it together and you can make it more of a competition to keep it interesting. If you’re single, consider creating a support group amongst your friends with a monetary reward for reaching your budgeting goals. Whether it’s a vacation fund or a night out on the town, the extra incentive will help keep your eyes focused on the goal and make it fun in the process.
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Image by eric731, via Flickr