Planning for the future starts with budgeting. This is a term many people do not like to hear but it necessary when you have something to save for or if you are trying to get out of debt. Budgeting is the beginning of you becoming financially sound and being a good steward over your money.
There are several ways you can begin budgeting and planning for the future and we will discuss 5 ways below:
1. Creating a list of monthly income – It all starts with making a list of all of your monthly guaranteed income. This is the money you make from your job, investments, and/or other residual income opportunities. This is the money that you know you will generate every month. When you create this list you will get a clear idea of what you have coming in monthly and what you have to spend.
2. Tracking your expenses – After you have determined your monthly guaranteed income the next step is to list all of you expenses and keep track of them. There are monthly expenses that you will have regardless of where you live like food, car/house insurance, rent, gas, etc. Make sure you document all these areas so you have a clear list of where all your money is going monthly.
3. Developing categories for your expenses – Your next step is to categorize all of your expenses into three different areas:
- Fixed: Expenses that will not change from month to month like rent, insurance, etc.
- Essential: Expenses that you need to live but change monthly like food, gas, utilities.
- Non-essential: Expenses that are a want but not a need like eating out and entertainment.
4. Keeping good financial records – Now that you have categorized the expenses in your household make sure to keep good financial records of everything so you can see how the money is being spent from month to month. With technology you can have a copy of this on your computer and place it in the cloud to share with your spouse or others who are helping you get financial stable.
5. Determining your allowance – Once all these steps have been completed not you can determine what the left over allowance will be. This is done by calculating how much money is left after subtracting fixed and essential expenses. You will see how much money is let over and how much is going to non-essential expenses. These non-essential expenses can be the start of your savings and investment accounts.
This valuable information will help you determine the amount of money left for you to save and invest. As a general rule of thumb saving 10% of your income a month is a good start and can help you get to goals faster, but ideally you want to shoot from 20-30% savings. This will really help you reach your goals faster and allow you to set aside emergency funds and be better prepared for retirement and/or a a crisis.
This information is a good start to helping you plan for the future, but taking action is a must. Most people underestimate saving even 2% of their income a month. Every little bit helps and you have to start somewhere.