Having a solid understanding of where your money is going is good, but to be financially secure, you need to not just know where it is ending up but have a foundational plan in place for how you manage money. For some, staying on top of their finances is second nature. For the rest of us – here are a few easy ways to take control of your cash flow:
The 50/30/20 Rule
Start by watching for a month to see where your money is going. Label each expense you have as either a need, want or saving/debt repayment. Once you have a good understanding of your expenses, it’s time to make a budget. We highly recommend the 50/30/20 concept!
Fifty percent of your budget should be allocated to your “needs”. This includes things like housing bills, essential payments, groceries, mortgage and rent, and minimum payments for debt. If your needs are exceeding fifty percent of your income, it may be time to think about some lifestyle changes or finding a second source of income.
Thirty percent of your earnings can be allocated for “wants”. This may sound like a lot, but we are guessing you spend more than you think in this area. Wants include any bills you pay regularly that aren’t essential and you could do without – things like cable tv. This category will also include vacations, dining out, hobbies and sports fees, shopping, and gifts for others.
Lastly, we have savings and debt repayment. Allocate at least twenty percent of your income to improving your financial situation. If you have excess in other categories, this is the place to put it. Debt costs you money, so start by paying off anything with a higher interest rate first. Concentrating on building a savings and investment portfolio not only will help you when hard times arise, but will put you in the best situation for your golden years.
There are numerous apps available online that can help with maintaining your budget. Check out mint.com, YouNeedaBudget, and apps available from your local banking institution that include spending analytics.
These apps are a good way to keep track of savings in real time and let you compare different months/spending categories in order to save better for the future. Many applications will tell you if you are trending above or below your baseline from previous activity, with easy to read graphs and charts.
Do you find that you start with a solid plan but always end up blowing your budget through impulse spending? If self control is something that doesn’t come easy to you, the Envelope Method is a great way to reign yourself in and gain good habits. Eventually they may even become second nature!
Each month put the amount of cash that you owe for all bills and necessities (TV/Insurance/Hydro/Groceries etc.) inside labeled envelopes. Some people prefer to think in terms of weeks, not the over all month. In that case, divide your monthly bills by the amount of weeks in the current month and put that amount in the envelope each week. We highly suggest having a “savings” envelope that you see as just another bill. Any money left over is what you have to spend. Put these envelopes somewhere safe until you need them.
This method only works if you stay within the set boundaries. Never take money out of an envelope for something other than what it is intended. While some people prefer to continue on with this method, it is often only used as a short-term strategy to get your spending under control and develop good habits.
Budgeting should never feel overwhelming. You should always feel in control of where your hard earn pay is going. These three tips are a great starting point to ensuring a solid financial future.
Do you want a more in-depth plan for growing your assets? Brant Financial Group is a team of passionate financial advisors who can help you get the most out of your money! Schedule your appointment today and step into your future with confidence.