Creating and sticking to a strict financial budget will help optimize and improve your financial situation, not to mention reduce your stress levels. Whether you are keen to get out of debt, make financial cutbacks, or maximize your income and savings, a strict budget will help you gain control over your money and also enjoy some future forecasting.
If you are filled with dread at the mere thought of checking your bank balance, then this article is for you! Read on to discover 8 top tips for creating and sticking to a financial budget that will improve your financial outlook.
You might have wondered just why you should save your money. If you have what you need, why bother with setting some aside every month? There are quite a few reasons you should be saving money. Different people want different things.
A Budget Helps You Save Money
A savings account doesn’t necessarily need to only be for what you need – you might decide to use it for things you want, or want to do. For example, you might want to get married, but have you got enough to pay for one of the best engagement rings?
Saving up for larger purchases means you won’t have to finance them and won’t need to pay interest on them. You also might want to tuck money away for a new TV, a car, or even a vacation. The possibilities are endless.
Where you decide to save your money matters. It can pay you to save if you do it at the right bank. To earn interest on what you’re saving, do it with a CD (Certificate of Deposit), savings bond, money market account, or high-yield savings account. That way, when the interest rates go up, so will your yield.
That said, when interest rates go up, so do the rates on credit cards. That means that you must have money available for emergencies so that you don’t need to borrow to pay the bills.
Speaking of Emergencies
It’s imperative to always have an emergency fund you’ve saved to cover any unexpected expenses. Just think back to the height of the COVID-19 pandemic. How many people had to fall back on their emergency fund? What about all of the Americans who didn’t have one? Those people suffered greatly and may have even lost everything.
An emergency doesn’t need to be a pandemic either. It could be an illness, accident, or any number of issues that might pop up. If you don’t have a fund, make sure you start saving. Remember, the fund should have enough in it to cover a minimum of three months of your total expenses.
One more thing you might want to save for is retirement. Just remember that the sooner you begin saving for your retirement, the more you’ll have when you’re no longer a part of the workforce.
This type of saving generally happens within special sorts of accounts, like a 401(k) account. Money that’s invested into these types of accounts can grow because it earns interest. If that interest gets compounded, it can grow much faster.
Home Sweet Home
You might want to own your own home. If so, you’ll need to save for a down payment. If you’re able to save as much as 20% of the price of the home, you’ll be able to avoid PMI (private mortgage insurance) and you’ll get lower interest rates on your mortgage loan.
Saving also reduces the amount of money you’ll be borrowing, which makes the mortgage payments a bit more affordable. You’ll be able to figure out how much to set aside each month for a down payment based on your other goals for saving and your circumstances.
As you’re setting money aside each month for your various savings goals, don’t forget your children’s education. You might want to set up a 529 plan to save for your college tuition. These are attractive options because the money is allowed to grow sans taxes.
There are way too many things you could be saving for to list here. The point is, you should be saving. There’s always something to look forward to and most of those things take money. It’s best to have it on hand when you need it.
Setting Your Budget
If you have no idea where to start when it comes to money matters, follow these five basic steps to create a basic financial budget first:
- Track your income – make a list of your monthly paychecks, freelance or side-hustle income, plus any extras, such as eBay or garage sale money, inheritance, or lotto wins.
- Track your expenses – this list should include the 4 pillars of survival: food, shelter, utility bills, and transportation, followed by all other monthly expenses including debt repayments, savings, monthly subscriptions, insurance, personal spending, plus any other miscellaneous costs.
- Deduct your expenses from your income – if you implement the ‘zero-based budget plan’ mentioned below, then you should have no money left over each month, but if you do then don’t let the money go to waste on a frivolous purchase; assign it a task. Alternatively, if you find yourself in the red, make extra cutbacks or increase your hours on freelance work or any side-hustles you may have taken on to catch up financially.
- Hold yourself accountable – monitor your transactions and keep track of your expenses and income as the month progresses to avoid overspending.
- Adjust your budget each month – first track the month ahead, then alter your budget accordingly taking into account any additional costs (such as wedding presents, birthdays, or vacations), plus any extra income you anticipate earning.
Implement a Zero-Based Budget
In simple terms, this equates to income – expenses = $0. In other words, after you have created your budget, your income subtracted from your expenditure should add up to zero, with nothing left over.
When you budget to zero, every dollar should be assigned to a task, whether it be repaying a loan, paying off a credit card, or adding to your savings account
Budgeting to zero is a great way of maximizing every dollar you earn, rather than spending every dollar you earn. It is also the most practical way of saving, by incorporating your savings into your monthly budget and keeping payments flexible but consistent.
Your financial expenditure will vary from month to month, with some months being lighter or heavier than others. You may have a vacation, birthday, or car repair bill to pay, so your budget should reflect these extra expenses.
Adjust your budget each month by any extra expenditure and also keep paying into your savings account throughout the year. Flexibility and consistency are key to budgeting.
Beware Hidden Fees
Keep abreast of any monthly subscription fees, which spread over a year, can add up. Is it necessary to subscribe to multiple streaming platforms, or can you cut back in this area – i.e., stick to Netflix and Spotify and cancel the rest?
Also, make a note of any ‘free’ trials on platforms such as Amazon Prime and set a reminder to cancel before you incur any monthly charges.
Take a close look at your bank account too, tracking any ‘hidden’ monthly banking or transaction fees, and swapping to a free account if necessary.
Ensure to Factor in Loan Repayments
When creating your strict budget it’s easy to forget about any debt/loan payments that need to be paid back monthly. It’s important to factor in these payments first as forgetting to pay back a loan or missing a payment can impact your credit score.
Don’t fret as it’s very possible to stick to a budget while you repay loans. It may be slightly trickier, and your budget may be tighter but it’s very possible.
Shop Online to Reduce Grocery Costs
Shopping online is a simple, effective way to keep track of your monthly food budget and avoid waste and over-spending. Buying your food online and saving your shopping list for future orders will save you time, help you cut back on impulse purchases of faddy foods you are never going to eat, and plan your monthly meals and diet.
Creating a monthly meal plan will also enable you to eat more healthily and mindfully, in addition to maintaining a consistent budget.
Keep An Emergency Stash for Unexpected Expenses
It is essential to set aside an emergency fund in a subsidiary account, reserved for miscellaneous expenses such as an emergency root canal or household repairs. This way when something outside of your budget comes up you can still cover your costs. Take note that if any of these expenses occur multiple times throughout the year, it may be worth incorporating them permanently into your budget.
Beware Credit Cards
One of the simplest, most effective ways to get out and stay out of debt is to cut up your credit cards or at least reserve them for special purchases or vacations only.
Your finances will dramatically improve without the drain of monthly credit card repayments, high-interest rates, and fee increases, so stick to using a debit card; this way the money will come straight out of your bank account, and you will live within your means.
If you are a frequent traveler and like to take an emergency credit card for backup, just make sure that when you are back home you hide it in a drawer!