It’s never a bad time to create a budget or savings plan. After all, a budget and savings plan are designed to help you reach your financial goals – and those are so important!
However, sometimes creating a budget can feel overwhelming, and the first step may be unclear. Let’s review everything you need to know about creating a budget and saving enough money so you can reach your financial goals.
What Is Budgeting
Budgeting, in its simplest form, simply means to allocate a specific amount of money to certain expenses each month. But before you can do that, you need to understand exactly how much income you’re working with.
If you build a budget assuming the wrong income amount, that is a recipe for failure. You need to have a 100% accurate picture of all your income, and expenses before you begin creating a budget.
Like a good diet, the best budgets are the ones that work for you. It can’t be so strict that you simply can’t follow it, but it can’t be so flexible it doesn’t help you reach your goals.
Creating a Personalized Budget
Once you have an accurate picture of what your income and expenses are, it’s time to start creating a budget. A common budgeting approach is the 50-30-20 rule.
The 50-30-20 rule means 50% of your income should be dedicated to your necessary expenses (such as rent, grocery, electricity). You can allocate 30% of your income to your wants, (such as an expensive gym membership, new clothes, or dining out with friends), and 20% of your income needs to be saved.
A budget plan shouldn’t make your life miserable, but it should keep you in balance at all times and ensure you are not overspending in any single area.
Start Saving Money
The main purpose of creating a budget is so you can start saving money. Saving money is essential.
Having enough cash reserves in the bank to sustain your life, and living expenses, for a specific period of time will provide you with financial flexibility, stability, and will allow you to live life on your terms.
What Are Your Savings Options?
There are plenty of saving options available to you. Realistically, having a combination of savings options is the best recipe for success. Below are some of the most common saving options available today.
Ensuring you are leveraging your employer’s 401k is a great way to save money. A 401k has two fantastic benefits.
First and foremost, there are tax incentives to allocate money to your 401k. Secondly, many employers offer a 401k match.
That simply means an employer will contribute a specific percentage of your income to your 401k. This multiplies your savings rate!
A Savings Account
Additionally, a savings account is insured by the FDIC.
One of the downsides of a savings account is the lack of interest they produce. If you’re looking to earn interest on your money, without taking on risk, a CD from your local bank or credit union would be a great option.
However, you must be mindful that when you put your money in a CD, you cannot access it as easily as you could access your money in a savings account.
An Investment Account
Putting your money into an investment account is another savings option worth considering. An investment account managed by a professional financial advisor should earn a strong interest rate, and can even generate passive income.
Managing Your Cash Flow
Like a business, an individual or a family should manage their cash flow. How much money is coming in the household vs. how much money is leaving the household for various expenses?
If you are taking in more money than you are spending, you’re in a good position. Now, with the surplus, it’s time to start saving and investing that money accordingly.
Allocating Income for Life’s Different Stages
It’s important to note that saving doesn’t look the same at all the stages of your life. A young college student may not be able to save as much as a well-paid individual in their 40’s.
Depending on your life, and your circumstances (such as do you own a home, are you raising a child, do you have an employable trade, etc.), you’re saving needs will change. Despite how much you’re able to save, the important thing is that you create that saving muscle as early as possible.
It’s far too easy to get caught up in spending money and disregarding the importance of savings. One of the best budgeting tips is to develop good habits early!
Unsure Where to Begin?
Personal finance can be intimidating. There is a lot of terms, definitions, and formulas out there, sometimes it’s difficult to know exactly which one you should pay attention to or follow.
If you’re unsure where to begin, working with a professional financial advisor is a great place to begin. Financial advisors are not only a great resource to use for investment advice and management, they will also help you manage your finances and identify bloat in your spending habits.
An unbiased outside perspective is always incredibly helpful!