Despite their multiple advantages, many people find written budgets to be restrictive. That’s why when it comes to effective budgeting, ‘different strokes for different folks’ is more realistic than one size fits all. There are different budgeting styles and strategies suitable for various personality types.
Just because you find it challenging to stick to a formal budget doesn’t mean you have to go without the many benefits of having one. Here are a few several basic tips to help you make the most out of your budget.
1. Pay Yourself First. Treat your savings as though it’s the most important bill you pay each month, not unlike your rent, mortgage or car payment. Prioritize your “You” bill above every other bill and the moment you get paid, take your savings out.
2. Build an Emergency Fund. Keep 3-6 months of living expenses in an interest earning savings or retirement account. Some experts recommend as much as 6-9 months of expenses. Set aside 12% to 15 % of your income (or more) into an account. If you receive an employer match, this counts towards the 12% to 15%
If you’re saving for a future car, home or signature vacation, create a savings account for “future project.” Similarly, create an account for holiday, birthday and other annual expenses. Treat this like a “monthly bill.” If you typically spend $560 on Christmas presents, for instance, put aside $20 per month. If you’re saving for your children’s college fund, use a tax-advantaged plan like a 529 College Savings Plan.
3. Make Frugality a Habit. Shop around for competitive prices on significant expenditures. For instance, make sure you’re getting a good deal on insurance, shop wisely at the grocery store, decrease your penchant for restaurant hopping and when you go, use discount apps like Groupon or Scoutmob. Shop with a pre-written list and buy only the items on that list.
4. Review Your Total Spending. Once a month, review your total spending. You don’t have to break every expense into categories, but you should know how much money, in total, you’re spending each month and what expenses are costing the most. How does this compare to your income? How much are you saving?
5. Track Your Net Worth. Keep a spreadsheet in which you can track your total net worth, which is all of your assets (the value of your bank accounts, retirement accounts, brokerage accounts, home and car) minus your liabilities (debts). Monitor your net worth and update the spreadsheet once every 1-3 months.
6. Set Income Goals. The two elements to strong financial power are: earning more and spending less. To keep your budget balanced, it’s important to focus on ways to increase your earnings. Can you go after more clients or higher paying clients? Can you outsource some of your work so that you can grow your business or take on additional workload with a higher pay rate? Setting income goals is an important component of your financial health, regardless of whether you earn a steady paycheck or irregular income. If you get paid a varying amount every month, income goals are especially important. If your income is dynamic, you have the potential to achieve your new income goals a lot faster than many other people can.
If you can’t commit to maintaining and following a written budget, then incorporate “frugal habit” measures and financial “best practices” into your life to optimize your dollars.