Updated September 2, 2016 . AmFam Team
Few things feed possibility like financial freedom. Creating a budget with your dreams in mind will reveal truths about your spending, help you decide where to cut back and outline steps that will put you in a position to dream more fearlessly. Sharpening your metaphorical pencils will help you make decisions about your money that will make you happier in the long run.
A budget blends a thorough look at your current financial reality with steps that are reversed engineered from your long-term dreams. Saving for a house, car, retirement, vacation or kids’ college each come with unique considerations. Many plans are a combination of these goals happening simultaneously.
Between where you are and where you want to be are time, income and choices. Often the income part is fairly set. But maybe there are hidden financial opportunities you’re overlooking, like streamlining your personal belongings and turning your crowded storage areas into cash. Let’s start with your goals. That will uncover what steps need to be taken.
What are your financial objectives? Lowering your debt, saving for early retirement, purchasing something? Put them all down, then rank their priority. Paying off any debt that costs you money is first on the list.
Income-ing. Where does your money come from? Paychecks, interest, a tenant, driving Uber, eBay? For budgeting purposes, considering fixed income like paychecks is wise. For dreaming purposes, having some variables like commissions, bonuses or side hustles can help keep you motivated to make things happen. Turning your dormant possessions into cash often takes a little push.
The costs of living. Including all expenses — such as rent or mortgage payments, loan payments, minimum credit card payments, groceries and utilities — will let you see what percentage of your income each aspect is claiming. If possible, build in a monthly saving amount for planned events like holiday gift giving or travel.
Adding up the day-to-day. Write down everything you spend money on for a month, including coffee, gas, lunch, entertainment, etc. By identifying where your money goes, you’ll see where you can make budget adjustments. You may be able to consult your online banking summaries to tell you which categories are getting the biggest chunks. Those $5 coffees, while nice little rewards, could be traded for much larger rewards over time.
You do the math. Subtracting expenses from income can be eye-opening. If you're spending more than you bring in, the first step is deciding where to cut back. If you have extra money at the end of the month, the first financial move to is to pay off debt. Getting out from under debt that charges you interest comes before everything else. From there, building a surplus is smart, helping you handle the nagging realities of unexpected auto repairs, illnesses and more. Careful planning and saving will allow you to manage those surprises more easily.
Financial advisors recommend saving 10 percent of your income or more. The earlier you start, the better position you’ll be in for retirement. Planners say you should have enough cash on hand to cover six months of expenses. Recent financial turmoil has prompted many planners to increase that amount to 12 months.
Lowering credit card balances means keeping more of your money. Convincing yourself that paying interest isn’t in your best interest will change your outlook on debt. If you're promoted at work, automatically shifting raises into savings can make a big difference. Using income boosts to elevate financial plans or pay down debt faster is always smart.
Money has a strange power to make people uncomfortable. Taking control of your situation takes the power back. Getting everyone in your household on board with a budget will make everyone happier in the long run and bring your family’s dreams even closer.
This article is for informational purposes only and based on information that is widely available. This information does not, and is not intended to, constitute legal or financial advice. You should contact a professional for advice specific to your situation.