Monday, 4 May 2015

No matter where you are in your career—first job, mid-career, or nearing retirement—it's a simple truth that without a budgetary playbook, you're losing the game before you start.

Good budgeting skills can make navigating your financial life a lot easier. After all, no coach goes into a game without a plan, and in the game of life, neither should you.

Understand your goals

You'll be more successful with your budget if you know why you're making one. Set aside some time to think about these "whys" before you look at the numbers and set up goals.

  • Do you want to have a better grasp of your income and expenses so you can avoid "surprises"?
  • Do you want to save for a child's college education?
  • Do you anticipate expensive home renovations in the next few years?
  • Do you want to pay off debt?
  • Do you have a big financial goal in mind, like having a six-month emergency cushion or going on a special family trip?
  • Once you know and understand the "whys," setting up the goals and a game plan should be much easier.

Listen to the experts

Smart players know to listen to the experts, in this case, financial planners. While exact percentages vary, most financial planners recommend that you allocate your income to various expenses as follows:

  • 30 to 35 percent for housing: Rent or mortgage, homeowner's or renter's insurance, taxes, utilities, and maintenance
  • 15 to 20 percent for transportation: Car payments, train or bus fares, taxis, parking fees, insurance, and car maintenance
  • 15 to 20 percent for debt repayment: Credit cards, student loans, car loans, home equity loans
  • 10 to 15 percent for savings: Retirement accounts, a six-month emergency cushion, college savings for your children, and any other savings goals
  • 25 to 30 percent for discretionary items: Food, clothes, travel, toiletries, and entertainment

Look at all your monthly expenses. Keeping in mind the recommended budget allocations listed above, tally up your spending by category. You can individualize categories to fit your specific needs, e.g. adding a category for charitable donations or gifts.

  • Take a look at your monthly net income: the total you receive after taxes and all other deductions have been taken from your paycheck.
  • How much money are you spending on each of the above categories?
  • Does your spending match your income?
  • Does your spending align with your budgetary goals?

Check yourself

If there is a mismatch between your spending and your desired budget, do some homework. Dig into your spending habits and figure out where the problem is. Spend a month noting every single purchase you make.

  • Keep a daily log
  • Note prices, if possible
  • Try to categorize expenses into major categories as you go
  • Which expenses fall into the "want" category versus the "need" category?
  • See how these expenses fit into your budget goals. Are there surprises that take up more of your income than you realized? (Eating out is often a surprise budget "killer.") Think about how you can shift your spending to realign your expenses with your budget goals.

Get back on track

Start small when cutting back your budget by eliminating the things you'll miss the least. Simple examples include:

  • Make your morning coffee at home versus buying it
  • Fill up your car with regular instead of premium gas
  • Cut back two drinks from your regular night out
  • Buy pizza from the grocery store or make your own at home
  • Turn your thermostat down two degrees

These may seem simplistic, but it all adds up. The point is to establish control over your spending. Once you determine what you can, and can't, afford, your financial life will become a whole lot easier to manage.


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