Once you’re clear about how much money you’re bringing in consistently each month after taxes and you’ve gone over your bank statements for the last three months, made a record of every dollar you’ve spent, and segmented those into categories, this is what you need to do next:
Categorizing your expenses
Your expenses need to be in a hierarchy from the most important to the least important, so you never miss another important payment moving forward. This trains you to be disciplined to pay off your most important bills first, starting with your rent or mortgage payments. Thereafter, your savings and investments follow.
Select A Method
Whether it’s an App, a tax software https://taxfyle.com/blog/best-tax-software, an Excel or Google Sheet, or the old school pen and paper- choose a budgeting method that works best for you and stick to it. Avoid switching and changing your methods because this is just going to make the whole process messy and confusing.
Set Your Budgeting Limits
Give every dollar a designated place to go from the beginning of the month. Set boundaries and limits when it comes to your expenses, making a promise to yourself that you will not exceed the limits you have set. The fixed expenses are easy since the amount has already been decided for you, but for the variable expenses, set a realistic limit for yourself and promise yourself not to exceed that limit.
Saving for Retirement
Running out of money before you die? This is a very depressing idea and what’s even worse is that it happens to so many people. Most of the time it could have easily been avoided with better financial planning, although yes it is impossible to predict what is going to happen in the future. Aim to save at least 5-15% of your income in a special retirement fund, this is something that should be accounted for in your budget.
Set Up An Emergency Fund
This is going to be a separate account from your retirement fund. Ideally, you’ll want to have at least $2,000 in an emergency fund stashed away in an easy to access account. It is recommended that you keep these emergency funds in a separate account from all your other funds because you don’t want to accidentally use it all up and suddenly find yourself stuck with no money.
Set Up An Emergency Sinking Fund
A sinking fund is specifically for planned expenses that you know are coming up, like new tires of your car, for example. Creating a specific fund for those big-ticket items ensures that you don’t have to dip into your savings or emergency fund to do it.
One approach to paying off debt that has become popular in recent years is the Debt Snowball Method. What started off as a tiny, compact snowball quickly grew into a giant boulder as it gained momentum and speed. This is how paying off your debts is going to work with this approach, aptly named the Snowball Method because of its likeness to the snowball that gains momentum the longer it keeps going.