Effective budgeting plays a critical role in helping you reach your financial goals. A healthy budget can erode debt, build savings, and make every dollar stretch further. But according to FINRA’s 2016 National Financial Capability Study, many Americans aren’t planning ahead for their financial future. In the U.S., 50% of individuals said they don’t have enough in savings to cover expenses for three months if faced with illness, unemployment, or economic downturn.
Moreover, a 2016 GOBankingRates survey found that 69% of Americans have less than $1,000 in savings accounts altogether — while 34% said they have no savings at all. Establishing a budget from scratch can seem a little daunting at first, but it doesn’t have to be hard. Commit to a few good habits and set up a plan to save for the expected — and the unexpected — to achieve those financial goals, big or small.
1. Track what you spend.
Keep a close eye on the money flowing in — and out — of your account for at least one month. Itemize all expenses to get an accurate picture of how much you spend on every purchase, no matter how small. (That coffee counts!) This will help determine how best to allocate funds to meet your current financial needs. Just try not to be too frugal — too many limitations can set you up to fail. For example, if you get coffee every morning on the way to work, consider scaling that back to once or twice a week and shifting the money saved toward a rainy-day fund.
2. Establish clear spending priorities.
Setting aside some discretionary income each month is important, but a significant chunk of your earnings needs to be earmarked for the roof over your head. According to the U.S. Department of Housing and Urban Development, about 25–30% of your household income should go toward mortgage (or rent) and utilities.
3. Don’t overcomplicate things. Stick to a simple budget system.
Make your budget as easy to follow as possible. Financial experts recommend the 50/20/30 rule to keep your budget on track. Set aside 50% of your income to go toward the essentials, like the aforementioned roof over your head, food, clothing, medical care, and transportation. Dedicate 20% of your income to savings. And the remaining 30% can go toward expenses that enhance your lifestyle (think gym memberships, travel, hobbies, etc.).
4. Aim to pay down the most expensive debt — fast.
Once you’ve nailed down what cash is going where, shift your focus toward any debt. Pay off the most expensive debt first. Credit cards or loans with the highest interest rates get top billing. Pay more than the minimum payment to start making a dent in the total balance. Pledge to do this month after month and you’ll see a big difference.
5. Prepare for unexpected expenses.
Those stats we covered earlier about Americans’ lack of financial preparedness show that the struggle is real. Just remember that no amount is too small to sock away for rainy days or emergencies, if you can manage it. Paying down debt is important, but cash is king. Pay yourself first and consider opening up a higher-interest rate savings account to help boost your bottom line.
Creating a monthly budget is an attainable goal. It just starts with a few healthy financial habits. For more tips and advice, check out Comenity’s financial resources.