What types of thoughts or feelings come to mind when you read the word “budget?” For some, budgeting comes naturally, a skill that has been with them since a young age. For the rest of us, we may think, “I should be budgeting,” or “that’s scary and I don’t want to think about it, so I won’t.” Wherever you fall in that spectrum, the hard truth is that budgeting is a necessary tool to keep finances in check. Learning the difference between needs and wants can be a humbling experience. Watching debt disappear is a thrilling experience.
Enough about financial feelings… for now. Let’s dive into some tried and true skills that can help you set up the rest of your financial life. It’s not nearly as scary as the outcome of never looking at your account and using your debit and credit cards like gift cards, swipe until it’s gone.
Grab a piece of paper and a pen or download a fancy app that can help budget and let’s go to work.
Figure out what you’re working with:
How much income do you have in your household? This is any money that comes into your account. Revenue from rental properties, alimony, child support, paychecks, you name it. Also, this is after taxes and all those line items that you see deducting money from your paycheck. Go ahead and jot that total down. Not so scary, right?
Now make a line for every bill that you get. We’re talking car payments, rent/mortgage, heat, hot water, electricity, gym membership, taxes, HOA fees, credit cards, water bills, groceries, gas, all those things. Make a line for each one, or if you’re on a time crunch, surprise we have a basic worksheet here for you.
Now choose how you will divvy up your income to pay those bills:
There are many schools of thought on this topic, so take a minute to think about what would make you most comfortable and consistent.
- Some choose an envelope system where you take the cash and physically put money in various envelopes labeled with expenses and pay the bills as they come due. Anything left over is theirs for miscellaneous needs or wants.
- Others choose what is called a zero-based budget. Each dollar you receive has a place to go whether it is to pay a bill or save for the holiday season or even for fun money.
In the event of a financial emergency, (think needing to replace a blown-out tire, not wanting the newest smartphone) there should be some money set aside. Many experts agree that $1,000.00 is enough to set aside for emergencies.
If you experience an emergency before you have saved enough to cover it, look to Great Meadow Federal Credit Union for a low-rate personal loan to help you through.
How can I save?
Automatic transfers from checking to savings are an easy way to grow emergency savings or save for future expenses. Moving money from your checking account and into your savings account is the best way to save because having money in your checking account is a great way to spend it.
What if I have debt?
Most people do, so let’s face this head-on. Two methods come to mind when dealing with debt and they have to do with a bit of psychology.
The Debt Snowball will guide you to pay the minimum payment on each of your debts apart from the debt with the smallest balance, focus on paying this off first.
Each time you pay off a debt you apply the money you were paying and add it to the monthly payment of the next debt.
The Debt Avalanche is focused on interest rates. Take the debts and organize them by interest rate. Pay off the highest interest rate first and then move to the next.
The Debt Snowball tends to hold attention as the wins can really rack up at the beginning of the process. As for the Debt Avalanche, this method typically takes longer to pay off the first debt because it isn’t necessarily the smallest. So, whether you think you may need that rush of excitement early on or you’re thinking about the savings on interest in the long term, make the choice that best suits you.
Either way, making a plan to pay off debt is a step in the right direction.
Practice each month by revising your budget to be more accurate and proactive with expenses. We’re looking at you again holiday season. It won’t be perfect as life is unpredictable so do your best!
Following any formula to reduce debt and stay within your budget will help keep your finances in check, but it always starts with examining what you have and what you owe. Get excited and take control of your future! We are happy to help!