The 7 Basics of Budgeting
Do you want to get control of your finances but don’t know how or where to start? Are there financial goals that you have but can’t seem to reach? Do you ever ask yourself “Where does all of my money go?” You aren’t alone.
Setting a savings goal or getting out of debt are challenges that can be achieved with a little planning and discipline. Understanding the flow of your money, developing a plan, and committing to your budget are the keys toward financial stability and achieving your financial goals.
1. Ensure that all household parties are involved and determine goals
Building a successful budget depends on the participation of your entire household. When your partner and/or children set goals and are in agreement with the budget it assists in minimizing potential conflicts. If your goal is to save for a family vacation in 2 years, that is something that everyone can work toward! Goals can be as simple as reducing debt or as complex as purchasing a home in cash. For some individuals it may be surprising or uncomfortable to delve into spending habits, but objectively focusing on goals and building a secure financial future is a positive building block.
2. Review your recent account statements
The first step to building a budget is to determine where your money is being spent. A good starting point is to review at least two months worth of statements to average your transactions and view trends. As you review your statements, it is necessary to create a tally of expenses based on categories. Be sure to categorize every transaction listed on your statement – leaving out transactions can exclude important information on where your money is being spent. Some example categories include income, housing expenses, loan payments, transportation expenses, groceries, etc.
3. Compare your income and expenses to determine if there is a deficit
One of the biggest pitfalls of personal finance is overspending. When your expenses exceed your income you may be on a slippery slope towards increasing your debt. If you review your statements and see a deficit between your income and your expenses, you will need to evaluate your expenses to see what areas you can cut back on spending. Although easy solutions for reducing spending include not eating out or purchasing coffee, there are many more areas that can make a difference in saving. Here are some areas that may benefit you in reducing monthly costs:
- Household expenses: The Department of Energy states that you can save as much as 10% a year on heating and cooling by simply turning your thermostat back 7°-10°F for 8 hours a day from its normal setting. Being conscious of turning off appliances and electricity use can also help save money on your monthly bills.
- Insurance: If you pay high premiums for your auto or home insurance you may be inflating your monthly expenses. It is always a good idea to review your insurance policies on a yearly basis to ensure that you are receiving an affordable rate. Be sure to review your policy details as well to remove add-ons like rental or roadside insurance if these are not services that you need. GCEFCU is proud to offers in-house insurance services for auto, home, and more! Click here for more information or to receive a quote.
- Reviewing pay stubs: Your pay stub can provide a good indication of how much income you receive or could potentially receive. If you have recently experienced a life event such as a new child, marriage, divorce, or other qualifying event you should consider reviewing your tax filing status. Changing your filing status or dependents with your employer can potentially change the amount of your take home pay or tax refund. Although it may seem nice to receive a larger refund check annually, it may be more beneficial to receive more money per paycheck. If your essential expenses are exceeding your income, you may also want to adjust your employer-sponsored retirement plan contributions. It is extremely important to save for retirement, but it is also important to be financially stable in order to not carry excessive debt into retirement.
- Subscriptions: As subscription based entertainment is becoming more popular, many people find themselves enrolled in more subscriptions than they need. Removing extra subscriptions for similar products such as tv shows, gyms, fashion items, etc. can save money over the course of a month.
- Transportation: Although the convenience of a vehicle is important to most individuals, transportation costs can become excessive. In some cases carpooling, utilizing public transportation, or taking a bicycle could save on monthly expenses. You can also reduce transportation expenses by avoiding tollways or extensive road trips unless necessary.
4. Review and organize current debt obligations
To accurately assess your current debt, you should review any balances owed, interest rates, payment amounts, and payment frequencies. Once this information has been obtained, you can then organize your debt by interest rate. Debts with the highest interest rates are often the best option to start repaying first. The more interest you pay on a debt over time the more expensive that debt will become. It may also be helpful to combine unsecured debts to the lowest interest rate option available. For example, if you have multiple credit cards it may be advantageous for you to consolidate your balances to the card with the lowest interest rate. GCEFCU offers free balance transfers for our members who wish to consolidate their credit card debt.
5. Create a spending plan
A spending plan breaks down your expenses into essential bills, analyzes your income, and designates how you will allocate your remaining funds. Every dollar must be accounted for within your spending plan. If you receive a bonus or other unexpected income, this should be included in your spending plan as well. One of the most important aspects of a spending plan is to create set-aside savings. Set-aside savings prevents you from creating additional debt by instead saving ahead for recurring or unexpected expenses that may not come in the form of a monthly bill. These expenses can include annual insurance premiums, property or income tax, vehicle registration fees, or vehicle maintenance fees. If you are a homeowner, these unexpected expenses could include appliance replacement, hurricane preparation, and emergency repairs. If you have children these expenses could include sports fees, new clothes, doctor visits, school supplies, etc.
6. Create a debt repayment schedule
Within your spending plan you will also need to allocate funds for debt repayment. Once you start to repay your debt, you will begin to see a snowball effect. The snowball effect begins when you set aside a certain amount each month on top of your required minimum payment that goes towards the principal amount of your debt. Once one debt is paid off, you will be able to include the extra amount you set aside and the minimum payment amount of the debt you paid off towards another debt. For example, if you pay $100 in addition to your $50 regular payment for a credit card, once your credit card is paid off you will have $150 to put towards another debt. Seeing a timeline of when your debts will be paid off begins to provide you a true sense of relief and accomplishment that your financial goals are attainable. Click here for a free resource to develop a personalized debt elimination plan.
7. Maintain financial health
Congratulations! Once you have created a budget, spending plan, and debt repayment strategy you are ready to focus on maintaining your financial health. Maintaining your financial health includes avoiding excessive debt, maintaining savings habits, planning for retirement, and investing your funds in accounts that provide you a high rate of return. To view what options GCEFCU has for maintaining your financial health, please click here.
Post author: Elizabeth Thornton, CCUFC
The opinions expressed on this page are for informational purposes only and is not intended to provide legal or financial advice. The views expressed are those of the author of the article and may not reflect the views of the credit union.