Budgeting 101: It’s Easier Than You Think

When setting long-term financial goals, like saving and investing for retirement, it can be difficult to know where to start.

Many financial professionals typically recommend one of your first steps should be to make an easy-to-follow budget. Here are some budgeting basics to get you started:

Step #1: Review Your Finances

Before you make a budget, it’s a good time to review your overall financial picture. Take a look at your current monthly household income. How much money do you have left after you pay your monthly expenses?

Step #2: Pay Down Debt or Refinance

Many financial experts recommend paying down debt or refinancing to a lower interest rate, especially if you are paying an interest rate in the double digits. When you pay high-interest charges on your credit cards, you get nothing in return. Also, if you don’t pay your bills on time every month, it could negatively affect your credit score. That could spell trouble down the line if one of your goals is a new car or home.

Step #3: Set Aside Money for a Rainy Day Fund

Financial professionals typically suggest setting aside enough cash, which includes highly liquid cash-based investments, such as money market funds or interest-bearing bank accounts, to cover your day-to-day living expenses for 3-6 months. If an unexpected life event occurs, you’ll be glad you set aside some money for a rainy day.

Step #4: Cut Back on Expenses

Take stock of how much money you have left over each month after expenses. If you are spending most of your take-home pay, look for areas where you can reduce spending. You may not even realize how much you’re spending on certain things.

It can be helpful to separate your spending into two categories: necessities and luxuries. You may not be able to cut back on necessary items, such as food, housing and insurance. But can you cut back on certain luxuries? Think about all the times you eat out or get a new smartphone.

Step #5: Decide How Much You Should Save

After you know how much money you can put away each month, it’s a good time to use a financial calculator to get an idea of how much time and money you need to reach your goal. Some goals will require a larger investment over a longer period of time. However, in general, the earlier and more you can start saving, the better.

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