To budget or not to budget?

Many people think of budgeting as little more than a necessary evil, but the topic doesn’t have to be approached with a negative attitude. Budgeting can be a powerful tool for seeing what your money is being spent on, as well as helping you plan for the future. Whether you are a small business owner or an individual saving up for your retirement years, stop putting it off–you won’t regret it.

The primary goal of creating and sticking to a budget is to track the amount of money you can afford to spend on non-essentials now while still planning for a secure future. The first step in creating your budget is to differentiate between the amount that must be spent each month and what is disposable income. Begin by figuring out what you are paying each month for all of your various bills, then divide these amounts into fixed or variable costs. Your rent/mortgage payment and your car payment are fixed costs: the amounts do not change from month to month and you must pay these bills. Your electric bill, your grocery bill, and your gym membership are variable, since the amount can change each month or can be eliminated altogether. It is also essential that you have some money put away for an emergency; this amount should be completely free of earmarks and should be quickly and easily accessible. Once you have recorded these amounts, the remainder is your disposable income. It is this amount that you will need to focus on when saving for the future.

The amount that you should save or invest varies depending on your income, your lifestyle, and your age. If you are in your twenties or thirties, you can probably afford to start by putting away 5% of your net income; however, if you are in your fifties and have few retirement assets, you should consider saving or investing 10% or more of your income. When you initially set up your budget, it is important to closely monitor your spending habits for at least the first few months. Set up several categories to track where your money is going–a good set to start with might include Bills, Groceries, Vehicle Expenses, Daycare/School Expenses, Entertainment (eating out, movie tickets, concerts, etc.), Household Expenses, and Miscellaneous Purchases. It is important that you leave room in your budget for entertainment and fun activities, otherwise you may have a hard time sticking to it. However, after reviewing the numbers, you might realize that you are spending a large amount of your income on eating out and may be able to reduce this amount by paying more attention to your spending habits.

After the first few months, look over your expense categories and make any necessary adjustments. If you find that you have additional money left over each month, your first task should be to eliminate credit card debt or any loans with high interest rates. If you have a credit card with a high annual percentage rate, you may be spending more on interest than you would be earning by putting extra money into savings.

There are many options for how to start saving. There are stocks, bonds, savings accounts, IRAs, and 401Ks to mention just a few. A good way to begin saving is to start with a 401K through your employer; these accounts are funded with money from your paycheck before it is taxed, which automatically saves you a significant amount over the course of a year. Additionally, many employers participate in a matching program, so that whatever amount you contribute will be doubled by the employer (up to a certain amount). You should consider contributing the maximum amount that will be matched by your employer, since you will be receiving what basically amounts to free money. Make sure to research your specific 401K carefully, since many companies have a minimum time requirement; for example, if you leave the company within three years of starting, you may not have access to the employer contributions.

However you decide to track your expenses, just be sure to do so consistently and honestly. Whether you find it easier to use a computer program or pen and paper, you will discover that a budget is not something to be viewed negatively. It will help you keep track of your spending patterns in the present while saving for your future.

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