Financial Literacy Month - Budgeting For Beginners
Budgeting For Beginners
Ah, Spring is near, which means it is a great time to refresh your daily habits with the season change. For me, that means reviewing my existing budget to see if changes are warranted; to others, that may mean creating a budget for the first time.
Budgets are a critical first step towards financial literacy (did you know April is Financial Literacy month?) and, therefore, learning the basics of budgeting is vital.
Hence, today, we will be focusing on how to create a budget by covering what every beginner needs to know.
Step 1: Know your income
The most critical piece of budgeting is knowing your income because without this piece of knowledge, you cannot plan henceforth.
If you are still working, the easiest way to determine your income is to look at your paystub and calculate your after-tax monthly take-home income before any employer savings.
Budgeting in retirement is just as important so if you are living off your nest egg, you'll want to add up all your expected income from Social Security, pension, RMD's and other reasonable sources you can expect to use for your needs.
Once derived, we can move forward.
Step 2: Determine your essentials
The next component of budgeting is totaling your monthly essential expenditures. Examples of essentials include housing payments, vehicle payments, utilities, groceries, and debt repayments.
Some basic expenses may be static, such as utilities and housing payments. Still, others can be hacked, such as how much you spend on groceries, transportation, and debts through consolidation/refinancing.
Notably, if you have high-interest debt that exceeds 7%, you should consider consolidating it into a personal loan at a lower interest rate. Additionally, if you have debts unrelated to housing, vehicles, or education, you should strive to pay them off before saving since they tend to be unsecured and at high rates.
Step 3: Saving
That’s right, the S-word: saving! Once you know your income and mandatory expenses, you can determine how much to set aside for retirement or other long-term financial goals.
At Lundeen Abrams Advisors, we believe that saving 15% of your take-home income for retirement is a good starting point if you want to have enough down the road.
However, you may have to work up to this number if cash is tight.
Step 4: Discretionary spending
Woohoo! We have made it to the final category, which is discretionary spending.
With this category, you have free rein to spend on whatever you desire or need, including at restaurants, boutiques, and more.
However, be careful not to let your credit card get too much use, as it is essential to keep your spending here within the amount allocated towards it.
For myself, I used to create category caps on how much was allowable at restaurants and various outlets. But, find what works for you and stick to your plan.
How will you budget?
You now have the tools to begin budgeting and transforming your life to where you are the driver of your financial life. So, how will you spend and save going forward?
If you need help creating a budget, we are here to help. Just give us a call, and we will begin the financial planning process today!