More Resources
Table of Contents
In order to achieve financial security, everyone must learn how to budget and save money. Regardless of income, without these skills, you will never be able to maintain your standard of living forever. We have all heard the stories of lottery winners and highly paid professional athletes and celebrities that make millions of dollars only to end up broke.
The reason so many people never realize financial security is that they do not control their spending. Imagine your wealth is like a bucket that is constantly getting filled up by a hose. That is your income. But there are holes in the bucket, those are your expenses. You want to keep that bucket full of as much water as you can.
You may be able to increase your income to a certain extent, but that may also be largely out of your control, especially in the short term. You can definitely patch up some of the holes in your bucket by trimming your budget though.
Anyone can start saving money immediately by making and then sticking to a budget that aligns with their personal goals and values. The following tips and steps will help you craft a budget that works for you and your specific financial situation.
The study of optimal psychology tells us that you will be far more likely to change your behaviour or build a new good habit if it is tied to a meaningful goal that is important to you. Think about how good you would feel if you did not have to experience financial stress ever again. Also, think about what kinds of things you would do, and especially, how good you would feel while doing them if you weren’t worried about money.
As an example, let us say you went on a week-long vacation with your family or best friends to the destination of your dreams. You would certainly have fun, but what would it feel like if you paid for the whole trip on a credit card and you were not sure you were going to be able to afford the minimum payment when the bill is due next month? That nagging feeling in the back of your mind would take some enjoyment away from you.
Now let us say you properly budgeted all year for the trip, paid for half with cash and only put half on a credit card, and better still, easily had enough left in savings to pay off the credit card in a couple of months once you return. You would enjoy that trip so much more.
So write down some goals about what you would like to be able to do in your daily life, and in the next year, or even three years from now if money was not an obstacle.
Once you have some clearly defined goals, what used to seem like making a sacrifice will be reframed in your mind as a step towards a goal that is important to you.
The first step is to track every penny that you spend. Do this for at least a month. Every time to buy something or pay a bill, write it down either on paper or in a spreadsheet. It is important that you do it in real time and not wait until the end of the month and just look at your bank or credit card statement. This is the only way that you will have a crystal clear view of your spending.
The next step is to evaluate your spending habits according to your own personal goals and values. Only you can decide what you truly want. As an example, say you spend three hundred dollars a month on lunch at a restaurant every weekday. Every workday you are getting an expensive burrito or burger instead of brown bagging a sandwich from home.
Now think of how that three hundred dollars correlates back to your goals. What if you could save two hundred dollars a month on lunches and be that much closer to your goals? It does not have to be all or nothing either. Calculate what your financial picture would be like if you brought a lunch from home four days a week and splurged on your favorite barbacoa and brown rice burrito every Friday.
Figure out where you can cut expenses and try to cut as much out as you can. Common places where most people can save a lot of money are streaming services, restaurants, shopping trips, and sometimes utility bills.
Again, it does not need to be all or nothing. Maybe limit yourself to one streaming service at a time. You can only watch one at a time anyway. Once your favorite show is over for the season, move to the next service. The only thing you are sacrificing is watching the shows as soon as they come out, and even then you may still be able to do that depending on the schedules.
You likely will not be able to eliminate utility bills, but maybe make it a point to be diligent about turning off lights when you are not using them, and using your furnace or air conditioner a little bit less. You may be able to get on a lighter cell phone plan as well. No one of these things will make a substantial difference, but if you stack several of them on top of each other over the course of a year, it will undoubtedly make a substantial difference.
After evaluating your expenses, you will be able to make sound decisions that are meaningful to you about your budget.
Once you have evaluated your spending, it is time to make some changes to your behavior, and the first change is to pay your most important bill. That is what you pay to yourself and put into savings. 20% of your take home pay going directly into savings is an outstanding amount. It does not have to be that much though, it will depend on your circumstances. What is important is that it is a consistent amount that goes directly into your savings account every single time you get paid. Even ten dollars a paycheck is fine if you commit to it and also commit to raising the amount as your financial picture improves.
You can make your life as easy as possible by automating as many payments as you can. All your monthly bills and services can be set to auto pay so you know nothing will get overlooked or forgotten about. Doing this will also force you to not overspend and keep enough money in your account so the payments can get processed properly.
Credit card debt and its associated interest can wreck a budget quicker than just about anything. If you have credit card debt, try to make more than the minimum payment amount each month.
At this point, you will have a clear vision of your personal goals, you will know what is important to you, and you will have a comprehensive picture of where your money is going.
When making a budget, the best way to start is to divide up your income into three separate areas. The first is savings, the most important one. You can set up your bank account to automatically transfer money from chequing to savings every month or week. Try to set 20% aside for savings. If you cannot do that much, that is fine, just commit to something with the intention of getting it to 20% at some point.
The next step is to designate your “needs” and figure out how much you must set aside every month to pay for things you must pay for such as rent, bills, groceries, and other necessities. These are things that realistically you cannot go without. For most people, around 50% of their income will have to be set aside for their needs.
The third thing you need to account for is your wants. These are the things you spend money on that are strictly for your enjoyment. Things like restaurants, concert tickets and other luxuries. You may even want to open a separate savings account designated to save up for larger purchases such as vacations. Once you know you have money going into long term savings and enough set aside for paying your bills, you can spend every penny of your “wants'' dollars without any type of stress.
There are dozens of different budgeting apps available to download on your smartphone. If pen and paper are not your style, you may want to download one to help you monitor your spending and track your progress.
Some have features available that will link right to your bank account and analyze your budget for you. You can see where your money is going and also save for bigger expenses such as a new car down payment or other large purchases.
When shopping for a budgeting app make sure it provides actual value to you, especially if it charges you a fee. The last thing you want is it to add another needless bill to your account.
Make sure you are on the right path by choosing the right bank for you. Make sure you understand the fees you are being charged and decide if those fees provide value or if you should shop around for a different bank. Many banks have different kinds of accounts with different fee structures depending on the size of the account and the needs of the customer. If all you need is a simple account, there should be very little to no fees.
Once you set a budget, the first thing you should do if you have not already is build up an emergency fund in your savings account. Unexpected expenses or disruptions to your income can cause tremendous harm to your budget and your overall financial health.
Plan to have three months' worth of income saved up especially to use in an emergency. If you are not used to saving money, that may seem like a lot, but once you start saving, you will see that you can accumulate that much money quite quickly.
Your monthly budget is a great tool for most expenses, but larger expenses that only occur a few times a year may need special treatment. You need a strategy for larger planned expenses and also for unplanned, spur-of-the-moment expenses.
For a planned expense, such as a vacation, get out of the old habit of just putting it on a credit card and worrying about it later. Instead, pay for it upfront by saving a bit more money.
You already are paying yourself by putting money into a savings account, but if you are going on a vacation, figure out how much money you will need, then divide that by how many months you have to save up for it. If you need one thousand dollars for your vacation in five months, make it a point to save an extra two hundred dollars from the “wants” part of your budget and put it into your savings account. You can also have a whole separate account so the funds are not commingled.
Doing it this way will not only prevent you from having to pay credit card interest, but it will allow you to make a little bit of extra money since your savings account will accrue a little bit of interest. Saving money actually makes you money.
For more spur-of-the-moment purchases, a good strategy to use is called the Thirty Day Rule. If you want to make a purchase that is out of or stretches your budget, instead of buying it right away, decide to put off the purchase for thirty days and then reassess whether you really want it.
Quite often with those types of purchases, once the thirty days go by, you realize it would have been a bit of an impulse buy and you really didn't want it all that bad, to begin with. If you decide that you do in fact want to purchase it, you will have had an extra month to save up for it, and you will probably appreciate the purchase that much more.
As time goes on, you will need to make changes to your budget. For example, when your income goes up, you should decide where you want that extra money to go. Some should go into savings and you may decide eventually you want to live in a nicer house or apartment, in which case your “needs’ will go up. Regardless of what you decide, you should make it a point to increase your savings a little bit each year.
Your needs may even decrease. If you are following a strict budget and you start off having credit card debt, eventually that debt will be paid off and you will have extra money to put towards savings or your “wants”. When that happens, you should also make it a point to put some into savings, and since you are already accustomed to living on a bit less, it will be easy to do so.
Just make sure you revisit your budget occasionally and make sure that you are still spending your money according to your personal goals and values. When you are clear on those two things, sticking to your budget becomes very easy.