The United States is a market economy. We live in a consumer culture, where the economy is focused on the selling of consumer goods. This makes saving and budgeting difficult since most people are impulsive to spend. Therefore, before anything else, the most crucial step to becoming fiscally responsible is to learn self-control. The sooner you learn to control your impulses to spend, the easier it will be for you to budget and save.
When it comes to controlling spending habits, the most recommended method is to start a budget. A budget is a spending plan that is crucial for successful financial planning. Budgeting can implement a regular savings program, limit the overuse of credit, and assist with future financial security. The sole purpose of a budget is to help you live within your income. It helps you spend wisely, reinforce financial management practices, and reach financial goals.
Budgeting can be achieved with the 7 steps below:
- Set financial goals: Make sure your goals are clear and attainable by utilizing the SMART acronym (Specific, Measurable, Action-oriented, Realistic, and Time-based)
Example: I plan to save $5,000 for a down payment on a new car by saving $200 from each paycheck for two years.
2. Estimate your income: Take into account fixed income, such as your salary, that will be available for a period of time. It is best to do so on a monthly basis since most expenses are due each month.
3. Create an emergency fund: To prepare for unexpected expenses, set aside money to budget in case of an emergency.
4. Budget fixed expenses: Set aside money for expenses that you are obligated to pay, such as rent, car payments, credit card bills, or insurance.
5. Plan for variable expenses: Budgeting for variable expenses is a bit difficult than budgeting for expenses that are fixed. It is best to plan for them by using past spending as an estimate.
6. Track your spending: Keeping an eye on income and expenses allows you to compare actual amounts with budgeted amounts to determine variances.
7. Review: Since budgeting is an ongoing process, look over your spending plan to spot revisions that need to be made.
Note: A common mistake people make is to save the amount of money that is left over at the end of the month. This is unwise as there is often nothing left. Saving is a critical part of long-term financial security, so remember to always pay yourself first.
The Latte Factor
It is important to be conscious of your spending. A well-known money-saving strategy is The Latte Factor, coined by David Bach. It explains how unconscious spending on the smallest purchases, like a latte, adds up to a huge amount over time. It also explains how buying everyday items that have little to no value in life hinders savings.
Starting a budget can go a long way, even if you’re putting aside a small amount of money in your savings. It’s better to be prepared for emergencies, rather than borrowing money on credit and risk ending up in financial trouble.