The core of a solid financial freedom plan lies in knowing how to budget and save your money effectively. This is crucial to maintaining your wealth.
Ever wonder why many lottery winners end up broke shortly after winning? According to Fortune, nearly a third declare bankruptcy within five years. You’d think that millions of dollars would solve their problems, but if you don’t know how to budget your money, more money won’t fix anything.
Budgeting often gets a bad rap; most people cringe at the thought because they think every dollar spent is bad, which isn’t true. You don’t need to laboriously track every dollar you spend. Instead, view budgeting as building a habit. Change your financial habits, and you’ll start seeing the benefits, which can set you on the right path.
Here are ten practical tips for budgeting your money properly so you can save more in the long run:
1. Think About Limits:
Forget what you know about budgeting for a moment. Consider this: What’s your spending limit? In life, every action has a limit, and exceeding it often has consequences. Budgeting is no different. You need to know the point where your spending goes from acceptable to excessive. For instance, actor Johnny Depp’s extravagant spending was revealed during a lawsuit, but it’s a similar story that happens to regular people too. Identify your number – the point where spending moves from okay to too much.
2. Set an Annual Budget:
Living by a monthly budget might not capture the full scope of your expenses. Life’s costs vary from month to month. Set up an annual budget instead. Businesses use annual projections to make sure nothing slips through the cracks. Do the same for your personal finances. Create a yearly layout of your income and expenses so you don’t miss out on the big picture. I usually do mine during Christmas break, and then I just monitor and report for the rest of the year. It’s less work and more effective.
3. Avoid Letting Fun Ruin Your Budget:
It’s easy to let your budget slip in the name of having fun. Our family used to go to malls to enjoy ourselves, but as the kids grew, those trips got expensive. We had to find alternatives for fun that cost less but were still enjoyable. The focus should be on making memories, not on how much you spend.
4. Track Your Purchases:
How many times have you been surprised by a high credit card bill because you lost track of your spending? Unlike large companies that have approval processes for purchases, most individuals don’t. Be more aware of what and why you’re buying something. This helps you weed out unnecessary expenses and align your spending with your goals.
5. Challenge Every Cost:
You can almost always find a cheaper price if you look. Before buying, search for coupons or discounts online. When we were purchasing patio furniture, a quick search saved us over $100. This approach is particularly useful for big expenses like home repairs. Get multiple quotes to ensure you’re getting a fair deal.
6. Resist Impulse Buys:
Impulse buys can wreck your budget. Even when you think you’re getting a good deal, ask yourself if you really need the item. I used to buy clothes on clearance, only to find them unused later. Now, I keep a list of what I need before shopping. If it’s not on the list, I leave it.
7. Know the Difference Between Assets and Liabilities:
Investing in assets, like mutual funds or rental properties, can put money back in your pocket. On the other hand, things like cars and electronics often lose value quickly. Keep this in mind with every purchase.
8. Don’t Overspend on Upgrades:
It might be tempting to constantly update things like your car or home. However, use what you have until it no longer works. Plan these updates in your annual budget to avoid financial surprises.
9. Be Realistic About Your Goals:
If you’re consistently over budget despite not spending unnecessarily, your goals might be too strict. It’s great to have ambitious savings targets, but they should be realistic. Start with achievable goals and gradually work towards higher ones.
10. Have an Emergency Fund:
An emergency fund is crucial. While having 6-12 months of savings is ideal, it’s not always practical. Keep a decent amount in cash for emergencies to avoid going into debt. This could be a lifesaver when unexpected expenses arise.
By taking these steps, you can create a more effective budget and work towards a more secure financial future.
