Wondering where all of your money goes each month? If you’re one of the nearly 30% of Americans who live without a monthly budget, then you’re not alone. If you feel like you’re living paycheck to paycheck or struggling to make any financial progress, it might be time to take an honest look at your finances. Creating a budget, intimidating as it may sound, is the first major step toward financial stability.
Start with a Small Step
The key thing to know about budgeting is that you don’t need to be a financial expert to come up with one. Simply put, a budget is a record of two things: your income and your expenses. Start by looking at what you spend and what you earn in a month.
Most credit and debit cards provide spending summaries where you can see all of your expenses. You’re going to come across a lot of different styles of budgeting, but all of them start with this basic step of looking at your transaction history. Once you can see where all your money is being spent, you can hopefully start to see where you may want to make some changes.
Knowledge Is Power
When you take an honest look at your finances, you might be surprised by what you find. By putting your spending under scrutiny, you’re forced to evaluate what your priorities are.
For example, if you find that 30% of your monthly income is spent at restaurants and coffee shops but don’t have any savings set aside for an unexpected hospital bill, you might need to change your habits a little bit to build savings for emergencies. Being honest with yourself about your spending is uncomfortable for sure, but knowing what could be holding you back is a crucial part of breaking bad habits.
Go After Your Goals
Budgeting is an important step toward achieving your goals, whether you’re aiming to pay off debt as quickly as possible or save up for your next vacation. But if you’re overwhelmed by debt or living paycheck to paycheck, it can be difficult to know what your goals actually are. If you don’t know where to begin, try following a step-by-step financial plan, such as Dave Ramsey’s 7 Baby Steps.
Dave Ramsey’s 7 Baby Steps
- Save $1,000 for your starter emergency fund.
- Pay off all debt (except your mortgage).
- Save 3-6 months of expenses for a fully funded emergency fund.
- Invest 15% of your monthly income in retirement.
- Save for your child’s college fund.
- Pay off your home early.
- Build wealth and give.
Other experts such as Suze Orman offer different strategies to quickly pay off debt, raise your credit score, and build out a plan for spending and savings.
Suze Orman 5 Step Action Plan
- Pay Off Your Credit Card Debt
- Raise Your FICO Score
- Create a Spending Action Plan
- Create a Savings Action Plan
- Create a Retirement Action Plan
These are just two of many different ways to organize your finances. No matter what your bank account looks like, you’re always in a good place to start making goals and planning your finances.
Know What You Can Spend
When you’re trying to save for a larger expenditure, budgeting can help you achieve the big picture that could otherwise seem out of reach. By calculating your monthly income and expenses, you can easily plan for larger purchases and spending goals.
Whether you’re looking to buy a car, a new laptop, or indulge in a vacation, making a budget will help you know just how much you have to put away each month to make the purchase. Even a large amount is manageable with the right amount of planning.
Give Yourself Peace of Mind
Ultimately, creating a budget is a tool to help you get familiar with your own finances. Even when your situation may feel chaotic and unmanageable, budgeting is a simple way to help you create some stability and reduce money-related stress. Being in control of your finances brings peace of mind so that you can focus on the things you really care about.