The Painless Way to Budget and Protect Your Future
By Donna Freedman
"Get out of debt and save money" is the fifth most commonly broken New Year's resolution, according to Time. The No. 1 busted promise is -– you guessed it –- "Lose weight and get fit."
Both are great goals to have, and both will ultimately make your life better. But you're almost certain to fail at both unless you create a specific plan and (here comes the hard part) follow through. Taking control of your finances is possible only if you have a spending plan, also known as a budget. But don't budgets hurt? Not if you do them right.
A successful budget includes goals. You need a reason to follow a regimen, whether fiscal or physical. That goal should be:
- Specific. "I want to handle money better" could mean anything. Paying only two overdraft fees a month is technically better than your usual five.
- Important. Maybe you've always wanted to self-publish a science fiction novel. That's an intriguing goal, but it shouldn't come at the expense of, say, an emergency fund or regular contributions to a retirement account.
- Achievable. Sure, it'd be great to pay off your mortgage within two years while also clearing $30,000 in student loans. Don't set yourself up to fail with unrealistic objectives. Do resolve to set reasonable objectives and use the momentum of each success to keep moving toward bigger goals.
Some goals are short term, e.g., paying off a credit card or setting money aside for new winter boots. Others, such as buying a home or saving for retirement, won't happen overnight.
Personal finance author Liz Weston is a fan of the 50/30/20 budget: No more than half of after-tax income going toward "must-haves," 30 percent for "wants" and 20 percent for savings and debt repayment. Thus you would put basics like rent and utilities under "must-haves" and that new-boots fund under "wants" (unless your current pair lets slush in at every step).
These categories are somewhat flexible. If paying down consumer debt faster or putting more in retirement is a priority for you, then shoot some of your "wants" dollars toward those goals. Look for ways to add more cash to the categories that matter most. Here's where frugal hacks come in handy. Every dollar you don't spend is a dollar that can be sent toward the future. See these Money Talks News articles for money-saving tactics:
- How to Find Thousands of Freebies.
- 7 Money-Saving Tips People Often Forget About.
- 9 'Convenience' Foods That Are Incredibly Cheap and Easy.
- How to Save At Least 10 Percent on Everything You Buy.
- 7 Ways to Go to the Movies For Free.
- 30 Tips to Save on Food.
- Get Millions of Books and Magazines for Free.
When it comes to big-ticket hacks, Jeanette Pavini of Coupons.com suggests assigning one change per week or month, e.g., "I will shop around for more affordable auto insurance," or "I will look for a better credit card rate." "Write them down so you are accountable," Pavini says, "and acknowledge little victories along the way."
Care for the Future You
Incidentally, retirement planning should take priority over debt repayment. Not contributing means you're giving up potential company matches if you have a plan at work. Even if your employer doesn't match, every dollar you don't put toward retirement is a dollar that won't help you later on. (Hint: Every $100 you put toward retirement in your 20s could grow to more than $2,000 by the time you retire.)
Weston suggests setting aside 10 percent of your salary for those post-work years. Yes, it will be tough. Yes, young adulthood is beset with other demands on your salary (student debt, vehicle loans, Saturday nights out). And yes, this is the optimal time to start. "Ask any of your older co-workers if it gets any easier to save for retirement," Weston says.
Track Those Dollars
If you need help budgeting, ask for it. Groups like the National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies offer help with getting your finances in line. Often that advice is free. Check any credit counseling organization through the Better Business Bureau and your state attorney general's office.
Before revamping your spending, figure out where the money is going right now. Some people write down what they spend and create spreadsheets of their expenditures. But there's a much easier way -- online budgeting sites/apps such as Mint.com or PowerWallet, which will track your cash and measure your progress. PowerWallet may also give you coupons plus tips on the best financial products.
Setting limits doesn't mean nixing any future fun. What it does mean is being aware of how money leaves your hands. Snacks, lapsed promotional offers and banking fees are all examples of small expenses that can wreck your finances.
However, this not set-it-and-forget-it. As Stacy Johnson notes in the video, it's essential to monitor the progress of your budget, i.e., what you planned to do versus what you actually did. The last month of the year is a particularly easy time to let little things slide, e.g., you forgot about the office Christmas party or neglected to budget for holiday tips for your baby sitter or hairdresser.
Monitor Your Progress
Go over your spending plan regularly to compare it with your actual spending. If you find that you're busting your budget regularly, time to re-motivate yourself. Think about why having control over your finances is so important. Remind yourself that both current and future needs will be met only if you get smarter about money practices.
Use this phrase as needed: "That's not in the budget right now." This is not punishment, but rather wise use of available funds. (Welcome to adulthood! It isn't always fun!) Besides, the words "right now" leave the door open to eventual spending once you've zeroed out debts and made provisions for the future. That's not deprivation. It's security. And it will feel great.