NEW YORK (AP) — Budgeting is key to managing your finances, whether you’re trying to pay down debt, start an emergency fund or deal with the fallout from inflation.
Creating a budget is a lot like trying to eat better or exercise more: Everyone tells you it’s good for you, but it’s hard to get into the habit, said Colleen McCreary, financial consumer advocate at Credit Karma.
“A lot of people think it’s too complicated and too difficult to do,” McCreary said. “Just like going to the gym, the hardest part is showing up, so you just have to decide that you’re going to try it.”
Even with prices high due to inflation, Elena Pelayo, an educator at How Money Works, a financial education organization, said there are small steps you can take to manage your money. These include seeing how many online subscriptions you pay for or how often you eat out at restaurants and cutting back on what you can.
Here are five important steps when you’re ready to create a budget:
1. WRITE IT
Writing down all your expenses is crucial, Pelayo said. She suggests recording every penny you spend rather than trying to approximate, which can lead to errors.
Pelayo recommends using the method that works best for you, whether that’s writing it down on paper, creating an Excel spreadsheet, or using a website.
Next, he recommends categorizing where your income should be spent. Always start by covering your basic needs.
A well-known budgeting system is the 50/30/20 rule, where 50% of your income goes to necessities like food and rent, 30% to things you want, and 20% to savings and paying off debt.
Wiltrice Rogers of Allen Park, Michigan has used this system for over 30 years.
“It helped me see how beneficial it is and that we have more discretionary funding when I follow this method,” said Rogers, an intake coordinator for a nonprofit organization.
Websites like NerdWallet or Money Fit offer 50/30/20 calculators to help.
This method works for many people, but it might not be right for you if needs consume more than 50 percent, in which case you’ll need to allocate less for savings or things you want to do or buy.
2. BUDGET FORMAT
Writing down your after-tax salary and then adding your expenses in a blank notebook or spreadsheet might be enough to make a plan. But if you need help visualizing what’s going in and what’s going out, there are resources available.
“There are many templates online that will help you look up expense categories and expense categories for personal finance. And they are really useful,” said Pelayo.
The Federal Trade Commission offers a printable PDF budget template, and Microsoft offers Excel templates for special occasions, like saving for a wedding or building a house. If you prefer apps, Mint, PocketGuard, and EveryDollar are among Bankrate’s top five budgeting apps.
3. MAKE A REALISTIC PLAN
If 50/30/20 isn’t realistic for you, there are still ways to save and deal with debt. Start setting aside small amounts of money each month or set small goals, like choosing a restaurant where you won’t spend more than $40, McCreary said.
“Small steps lead to progress,” he said. “It’s really about progress, not perfection.”
McCreary recommends starting with a goal each week, whether it’s saving a certain amount or reducing the amount you spend on things you don’t need.
“Don’t overcomplicate it, don’t make it too difficult for yourself,” he said.
Rogers, for example, generally tries to save as much money as possible when shopping for groceries.
“I receive the sales papers and mark what we need and if it is on sale. I try to triangle the stores to save time and gas,” she said. She also buys in bulk, sticking to her shopping list and shopping alone to prevent her son and her husband from convincing her to buy additional items.
Websites like Flipp, which displays digital brochures from major retailers around you, and Groupon, where you can find coupons for products and services, can make it easy to save money. But keep in mind that this only works when you’re using coupons for items you really need or plan to buy anyway.
If your income only covers your necessities, reducing credit card debt can be a challenge. Pelayo recommends that even if you live paycheck to paycheck, you may want to add at least $10 on top of the minimum payment on your highest-interest-rate credit card. And if you can afford it, he recommends paying 10% more than the minimum payment per month.
4. MAKE IT A HABIT
To achieve your financial goals through a budget, you have to change your mindset, Pelayo said.
“You have to look inside yourself and say, am I willing to change my habits?” she said.
Once you are mentally prepared, you can start setting goals.
— Set a time goal
Developing new habits can be hard, and it’s even more daunting to think about having to stick with them for the rest of your life.
McCreary recommends that your first goal be to stick to a budget for two weeks. After achieving that, he can set a longer timeline, like 30 days or six months, until he gets into his routine.
— Gamify your budget
If you’re still struggling, McCreary recommends playing with your budget and making it a challenge.
“Perhaps there is an outcome involved. Like ‘Hey, if we save enough money, we can buy a new TV or go on vacation,’” she said.
Examples of gamification include giving yourself a small reward after a certain amount of time or money you’ve saved.
Apps like Mint, which rewards the number of times you review your budget, and Acorns, which lets users invest with their spare change, can help. Yotta and Save to Win allow users to create bank savings accounts that reward them for the amount they save.
For accountant Tiffona Stewart, playing with her savings meant using the envelope system, in which you put money into envelopes for specific expenses.
“This fits your life and what you want to save for, so that’s what I like,” Stewart said.
Stewart also started a business selling budget envelopes and folders on Etsy as a way to encourage and promote financial education. She sells “one month challenge” packages intended to help save $1,000 in cash.
“You play those games and you make these things your own. You are trying something new, there is no right or wrong, you might be wrong one month and then better the next,” she said.
5. INVOLVE YOUR FAMILY OR FRIENDS
As with any lifestyle change, having people around you to support your decisions and encourage healthy habits is crucial, McCreary said. That might include talking to your partner about your finances, telling your friends you’re starting to budget, or explaining to your kids how the family spends money now.
Rogers’ 11-year-old son now knows that if there isn’t a coupon for the item, they don’t get it.
In Stewart’s case, it helped to use cash when out with friends. If she only takes $100 to the bar and doesn’t bring her credit card, and she wants to pay for another round but only has $20 left, she just can’t spend any more, she said.
“You need everyone who is involved in those decisions to make a commitment with you to support you,” McCreary said.
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Source: apnews.com