Even the most thrifty people in the world need a budget. As you get older, budgeting becomes increasingly important. In fact, it will often dictate whether you’re able to retire or not. Fortunately, a basic budget is all that’s required to keep tabs on your income and expenses. Once you’ve organized everything through a budget plan, it’s time to revamp your savings to ensure you meet future financial goals.
Outline Your Budget
- Income – Write down all sources of income. If you and your spouse receive income from only one source, this part of the budget will be easy.
- Expenses – Gather up all of your expenses for the year. While many people sit down to think of monthly expenses, remember that some expenses might be paid annually or semi-annually like taxes or insurance, for example. Include every expense that you have for the year. Then, break everything down into monthly amounts, even if you don’t pay certain expenses on a month-by-month basis.
Build Your Budget
List all of your income and expenses. There are two ways to go about doing this:
- Spreadsheets – A basic accounting ledger can work. The only problem is the amount of manual work involved with this method. If you’re comfortable with writing each income and expense item as they happen, just pick up a basic ledger book from an office supply store and use that. If you’re savvy with a computer, use anything from Microsoft’s Excel program, or any of the Excel-like clones on the market. These spreadsheet programs mimic an accounting ledger and will allow you to accomplish the same thing. The difference is that you can automate some aspects of the data entry process and there won’t be any erasure marks in your ledger.
- Software Programs – Software programs do a lot to automate the budgeting process. If you’re looking for simplicity, this is the way to go. Computers won’t get the math wrong, and will often save you a lot of time in the long run. Generally, you can enter the income or expense item one time and many programs will automate as much of the record keeping process as possible. Variable expenses won’t be automatically accounted for, but that’s because they change each month. Ditto for any variable income you receive.
List all of your income as an “asset” in one column on your ledger (you can also use an entire page devoted to assets/income) and one column or page for expenses. This way, you’re only dealing with one or two pages, at most. Software programs already have a built-in process for this and you’ll have to follow whatever format the software already uses.
Tracking and Updating
When tracking your income and expenses, pay special attention to variability in your budget. For expenses, it may be helpful to build up a cash reserve. This reserve will help to manage that variability and won’t leave you bouncing checks when you need to pay an unexpectedly large expense. Generally, a cash reserve equal to one month’s expenses is sufficient. While there’s no need to track and update your expenses every day, you could do this. Ideally, you would track and update your budget each week to make sure your income and expenses are not veering off-track.
There are a few ways to do this:
The Reconciliation Method – the reconciliation method is one you are probably most familiar with. Every bank in the United States encourages this through the use of “balancing your checkbook.” In effect, you reconcile your expenses after you have spent money. Notations are made in your ledger after each expense. Then, at the end of the week or month, you reconcile those expenses. It’s labor intensive, and it could potentially leave you bouncing checks if you’re living paycheck to paycheck, but it’s an old and trusted method for many folks.
The Envelope Method – The envelope method prevents you from overspending by allocating all of your money to envelopes. Each envelope represents a different expense. Income is generally not tracked using this method, so it’s considered a simple cash flow planning method. Today, various computer software programs eliminate the need for physical envelopes but you could certainly stuff money into an envelope and carry it around with you if you wish.
Determine Savings Goals
Once you have a budget, it’s time to make some savings goals. Don’t go crazy with these. Just start with three to five goals to start. If you can’t think of three, that’s fine. Choose one to start. These goals could be long-term, like retirement planning, or they could be short-term, like a vacation this year. A few things to remember:
Make value-driven goals. Your financial goals should be directly tied into your values. Don’t pursue goals that you think a financial planner would want you to pursue. Also, don’t worry so much about what your neighbor, friends, and family are or aren’t doing. Make goals oriented around things that you really want to do now and into the future. This is the secret to staying motivated through to the end.
Never sacrifice your values. It’s never a good idea to sacrifice something that you really find valuable. For example, many financial advisers might tell you to stop going to the movies on Friday night or to stop going out to Starbucks for coffee every day. If these things are important to you, then you should do them. You should, however, weigh everything you do against your long-term goals. The idea is to not do anything that would sacrifice the “here and now” for the future and vice versa. It’s difficult, but well worth it in the end – you won’t feel like you’re “giving up” anything when saving money.
Don’t try to take on too much at once. You can only focus on so many things at once. If you find yourself saying “I have too much on my plate,” it could be a sign that you’re stretching yourself thin. You can’t possibly save money for every single contingency, and you can’t pursue everything little thing that interests you in the least little bit simply because there are only so many hours in the day. Choose your top values in life to pursue, make a commitment to them, and don’t look back.
Simple Tips and Guidelines For Saving Money and Investing
Some financial advisers suggest that, if you’re in you’re 50 or over, you should be saving at least 20 percent of your income. Much of your savings needs are driven by your financial goals, and what you want to do in the future, however. If you already have $500,000 saved up, and you don’t plan on ever fully retiring, you may need less money that if you only have $50,000 saved up. A good retirement planning calculator will help you determine how much you should be saving.
Investments can be a tricky topic. In general, never use investments that you don’t understand. That’s not to say that you shouldn’t invest in anything if you don’t really understand anything. You should investigate a variety of simple to use investment products (to start out), learn how they work, and then save and invest enough to meet your financial goals. Some good investments to research would be bank CDs, annuities (to guarantee your income when you retire), index mutual funds, precious metal-based investments (if you are worried about inflation of economic uncertainty), and dividend-paying stocks from well-established and financially stable companies. You can find a wealth on information on sites like Investopedia.com and by talking to an experienced financial adviser.
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