Today, managing personal finances is more complex that ever. This is especially true if you’re young, or starting a new family- new expenses just seem to keep popping up. The main mistake people make is assuming their finances are just a matter of addition and subtraction and that making a monthly budget isn’t necessary. The fact is, managing your personal finances does take planning, and as the case with dieting or any significant change in one’s habits or lifestyle, temptations can be compulsive and difficult track- so we need to keep an eye on ourselves. Here are five important ways you can track your spending, manage your income, and maybe even scrape together a nice nest egg.
Know The Big 3
No matter what your financial situation is, making a monthly budget that really works will be predicated on knowing your income, your expenses, and your assets. While some of us might like thinking we can track all these figure in our heads, it’s advisable to get it down on paper. Writing down your income and what you owe is the first step to taking the guesswork out of running a budget. If you don’t take this simple step, we guarantee, you will be guessing where your money went each and every month, and that’s no fun.
Track Your Spending
Now that you’ve got your cash flow nailed down in writing, it’s time to start tracking your spending. Writing down everything you spend and mounting that list on the refrigerator or over your desk will help to take the mystery out of where your money is going. Most importantly, getting in the habit of writing down everything you spend money on will give you the chance to pause and think twice before making a frivolous purchase (free money tools). Over time, you’ll find adding this layer of mindfulness to your spending habits will save you money in the long run.
Make Your Savings Contributions Automatic
There’s a reason your payroll taxes come out automatically – Uncle Sam knows people would always forget them if they were left to pay them on their own. Think of building your savings the same way. Setting up your bank account to automatically direct a certain portion of your income into savings is a good way to eliminate the temptation to use your monthly savings on something you don’t need and get the whole process off your mind and into action.
Now that we’ve got some good habits laid out for you, let’s make your budget a little more sophisticated. You should separate your outgoing funds into at least three categories:
- Bills- these would be rent, utilities, car payments, insurance payments, etc.
- Recreation- this is your entertainment budget for things like movies, hobby items, eating out and general fun stuff.
- Unexpected Necessities- these would be bills for unexpected automobile maintenance, traffic tickets, and anything compulsory that you are not able to plan for.
You could even break down some things into finer categories, such as clothing expenditures. That said, clothes can be a necessary expense, like a heavy jacket for the cold winter weather, or an optional non-necessary expense such as that attractive (and pricey) brand name scarf you just had to have.
Make Verbal Promises
Not unlike dieting, sticking to your budget and actually creating your safety net is largely a matter of willpower and forming good habits. In psychology, we learn that when other people are aware of our goals we are more inclined to stick to them. Conversely, if we are the only ones who are aware of our goals- we’re more likely to blow them off in a moment of weakness. Telling friends and family that you have specific goals sets you up with a kind of contract that you are likely to take more seriously than if you kept them to yourself.
Stick to Your Monthly Budget
Rather than treat your important financial decision to set a monthly budget as a negative or something that’s “hemming you in,” embrace the mindfulness that comes from watching your expenses. In a relatively short period of time, you’ll see more money in your bank account and you’ll gain the wisdom that comes from knowing one more frivilous shopping trip or lavish dinner really doesn’t add nor subtract to your overall happiness. Getting a handle on your expenses and putting something away every month, that can keep you feeling optimistic and in control of your life.
Download a free monthly budget worksheet from consumer.gov.