Hello again!… If you are following the steps then you should have 1-2 months worth of spending data on which to build your budget. You should also have your credit score and credit report.
Wait a minute. Did you not find a tool to record your daily spend and income?O.K. Don't sweat it. I got your back! Click Here. 😉
For those of your that did the work, lets talk. This is where its more cooking than baking, more going by your own taste versus following directions.
Below are a series of questions to ask yourself. This will help you to figure out your next steps.
a) Did you spend less than you earn for each month? If so, by how much?
b) Did you find any surprises in your spending?
Most people are shocked by how much they spend in restaurants, entertainment and groceries.
c) Did you spend more than you earn? Did you use your credit cards to make ends meet?
d) Did you pay yourself first:
1a. In any pre-tax spending such as retirement accounts, Health spending accounts, etc.?
1b. Did you contribute the maximum in your retirement savings? If not, do you contribute up to the company match?
3. In investment accounts? Emergency fund? Vacation fund? etc. …
e) Can you identify areas where you could pull back a little on the spending so that other areas could get funded?
f) Do your spending habits demonstrate who you really are?
g) Do you focus your money on areas that are most important in your life?
These questions are meant to make you think about your spending habits, where you are today and where you would like to be tomorrow.
Creating a household budget.
Now that you have some data on which to build your budget lets get started.
First thing to remember about budgeting is that it is flexible. This is the second biggest reason people fail at budgets. We start with what we know and think that is the way it will stay. But life is full of surprise, which is why we (and our budget) need to stay flexible.
Get a pay raise? Fold that into the budget – preferably under pay yourself first or pay off your debt categories. Have a baby? Get married? Car break down? You get the point.
For surprises that end up costing you money, an emergency fund comes in handy. More on this later.
What does it mean to spend with focus? Focused spending is spending your hard earned money on what really matters to you. The budget will reflect that focus by earmarking money to go to such things. Possibly even creating a line item to reflect that importance. No more mindless spending (buying stuff because the credit card has not been maxed out.).
Here's an example. This year you are planning on a trip… THE TRIP. The one you have been dreaming about. An opportunity has come up and you are not about to let a little thing like finances keep you from going. You do some quick napkin math and it comes out to about $1,000 (or about $84/ month).
Old you would have charged it. But not new you. New you is going to take a look at where you have budgeted your money and squeeze out $84/month. So you add the new line item: Vacation and give it $84/month for 12 months. Or maybe you are going in 6 months … $167/month for 6 months. You get the point. Check your total monthly budget spend and adjust accordingly and reasonably. New you will take the time to discipline you spending to get the things you really want in life. That, my friend, is the payoff.
Its a steal from Peter to pay Paul mentality.
Armed with your budget, your spending will be an extension of who you are and what makes you happy. If daily lattes make you happy then add a line item and ear mark some cash for it. The only rule is to live well below your income. (More on that later.)
Pay Yourself First.
We hear this all the time… pay yourself first. What does that mean? Paying yourself first is putting your money to work for you. Working money's sole purpose is to growth and multiply. This happens with two kinds of cash: Pre- and Post- Tax income.
Paying yourself first with PRE-tax Money.
These are things like your retirement account, HSA, and anything else that comes out of your pay check before taxes are applied. This has several benefits:
1. Lowers your overall tax bill.
2. Pre tax money is worth more because it hasn't been touched by taxes. Let's say, you are in the 24% tax bracket, pre tax money is worth 24% more than the money in your paycheck. Think about that for a moment.
3. 401k money has an element of free money when you contribute up to the company match. Most companies offer some kind of match, for example, if you contribute 6% of your overall pay, the company will match $0.50 for every dollar. That translates into a 50% increase without even taking into consideration compound interest. For every $100 the company will give you $50 for just participating!! F-R-E-E M-O-N-E-Y !!
4. HSAs are awesome!! First, you leverage pre-tax dollars. Second, when you use the money, its also tax free. Third, you can invest the money and the interest is also tax free. Forth, just like 401k, some companies will even contribute cash for just participating. WHAT?? yes, its true. Most people do not leverage this type of account. But new you will! 😉
Paying yourself with Post-Tax Money.
These are things like Roth IRA, Mutual funds, 529's, and anything else you invest in.
Roth IRA: The great thing about a Roth is the interest is tax free. The withdrawals are also tax free (because you are paying yourself first with money that has already been taxed). This gives you flexibility in retirement to leverage money from a “no-tax” account and “taxed” account (IRA, 401k, etc.). Having both an IRA and Roth gives you leverage in retirement.
Mutual Funds: There is no limit to how much we can contribute. The month grows and is available to us when we need it and is taxed when we withdraw money. These are good for medium to long term investing. Not good for short term investing because the money needs time to work and grow. Think compound interest and reinvest all earnings.
529's: Got kids? Got Grandkids? This is a great tool to set money aside for their college. Anyone can contribute and open. The money is invested conservatively with graduation date in mind… the younger the child, the longer the investments and the more aggressive the fund will be. Not to worry though, this is actively managed and adjusted to become more conservative as the child grows.
Clearly, there is a lot more ways to invest that is not discussed here but will be in other posts. My point here is to get you started but not overwhelm. Eat to full, not to stuffed.
If you have debt (like most people), click here to get 3 strategies to pay it off.
What's the most helpful tip you have ever received and from who?
Leave me a message in the comments below and good luck, thought I suspect you wont need it. 😉