7 Secrets To Creating a Successful Budget | Bankrate.com http://www.bankrate.com/finance/financial-literacy/secrets-to-creating...

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Secrets to creating a budget advertisement

By Shelly K. Schwartz Bankrate.com

Rawpixel.com/Shutterstock.com

You'd never set out on a cross-country road trip without consulting a map. Likewise, you
can't expect to reach your financial goals without developing a plan for spending and saving.

Budgets play a critical role in helping consumers pay off debt, build their nest egg and make
the most of their hard-earned dollars.

Yet, despite their best intentions, many Americans lack the money-management skills
necessary to get their bank accounts under control. Why? Often, it's because they don't
know where they stand, says Jim Tehan, a spokesman for Myvesta Foundation, a self-help
consumer education website.

"People write out budgets all the time without knowing where their money is really going," he
says. "What they've created is a wish list of how they'd like to spend their money, but it's not COMPARE RATES
realistic. It's a page of lies."
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The first step to developing a budget, says Tehan, is to track your expenses for at least a
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month, using a smartphone app computer program, or old-fashioned pen and paper. Be sure
to record every purchase, no matter how small.
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"Once you know where your money is going, you can make an educated decision about how
best to allocate your money," he says.

Many novice budgeters make the mistake of becoming too financially conservative, at least
on paper.

"The No. 1 rule of setting budgets is to not cut all the fun out of your life. Inevitably, Spartan
budgets that have no allowance for entertainment are doomed to fail."

Instead, learn to moderate. "If you're eating out every night, and that's something you enjoy
doing, try eating out once a week instead," says Tehan. "It's not about cutting out everything
that gives you joy in life. It's about better allocating your money."

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2. Make savings contributions automatically

Though every budget scenario is different, Curt Weil, a CFP professional and president of
the FPA of California, says a good rule of thumb is to allocate at least 10% of your earnings
toward savings, using direct deposit to pay yourself first.

Tehan agrees. "If you put that money aside before you even see it, you won't miss it. Direct
deposit helps to put your savings on autopilot."

Short-term savings that you may need to access can be held in an interest-bearing savings
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3. Define spending and priorities

Another 35% of your earnings, he says, should be earmarked for housing and utilities. Weil
says, however, that homeowners can often increase that percentage since principal
payments are already a form of forced savings, and the mortgage interest they pay is
tax-deductible.

If you're saving for something specific, such as a new car or your child's college education,
you may want to set aside another 10% of your earnings into an interest-bearing account or
a tax-favored 529 college savings plan.

Everything else -- the remaining 45% -- is discretionary, for use on food, entertainment,
clothing and vacations.

That's where priorities come in. You can't have everything you want, says Martin Siesta, a
CFP professional and founder of Compass Wealth Management in Maplewood, New Jersey,
but you can direct your dollars toward things you want the most.

"If consumers start by deciding what's most important to them, then cutting back on some of
the things that aren't that important isn't really a sacrifice," he says.

4. Pay with cash

Once you've determined how much to set aside for saving, spending and investing, it's time
to make those numbers stick. Using credit cards and debit cards makes it all too easy to
overspend.

With the exception of your mortgage and car loan, most consumers should implement a strict
policy of paying with cash for groceries, clothes, vacations and nonessential items.

Siesta also recommends relying less on ATMs, especially those that charge a fee.
Withdrawing a fixed amount of discretionary money at the beginning of the month, he says,
forces you to make better spending choices.

"By spending cash out of an envelope, you begin to get a better feeling for where your
money is going and what your priorities really are."

5. Strategically pay down expensive debt

You'll never get ahead if you don't also implement a plan to pay down your debt. Interest
payments made to credit cards not only cost you big, they also deny you the ability to apply
that money toward savings or entertainment.

"Not having to pay interest is the same, economically, as earning interest. So not having to
pay credit card interest is like earning 18%," says Weil.

According to TransUnion, the average credit card debt per borrower was $5,232 in the 3rd
quarter of 2015.

Consumers with multiple credit card balances should tackle the card with the highest interest

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rate first, while continuing to make minimum payments on their other cards. Once the first
card is paid off, focus on the next-highest-rate card.

Tehan contends, however, that some debt-laden consumers get a psychological boost by
paying off the smaller balances first. "Paying off your highest-rate card first makes sense
because it saves you the most money, but if you have several smaller cards, it can be easier
psychologically to get those out of the way first," says Tehan.

The secret to paying off debt is to determine how much you can afford to send each month
and make those payments consistently.

"It's important to keep sending the maximum amount you can afford to send," says Tehan.
"Some people make the mistake of reducing the amount they send when they see their
payments going down."

6. Build a safety net

No matter what your debt situation, you should also begin saving for a rainy day.

Financial planners recommend setting aside 3 to 6 months' worth of living expenses for an
emergency fund in case of job loss, illness or an unexpected bill.

"It's important to set aside savings while you're paying off debt," says Tehan. "It may sound
backward, but if you don't have an emergency account and you pay down your credit cards
for 6 months and then an emergency pops up, all the progress you have made is going to be
instantly wiped out."

The most painless way to save, of course, is to set aside any financial windfalls you receive,
such as bonuses, tax refunds or yearly raises. You could also try saving your change or any
$1 bills that find their way into your wallet.

7. Live within your means

Learning to live within your means is a simple matter of spending less than you make. For
most consumers, that means cutting back. It does not mean doing without.

According to Siesta, there are dozens of ways to reduce your monthly expenses without
crimping your lifestyle.

And above all else, stop trying to keep up with the Joneses. Your neighbors with the latest
clothes and luxury cars may be drowning in debt, and while you may not sport a designer
watch, you will be able to sleep at night.

"Being in control of your finances not only saves you money, but it also makes you a more
financially secure person and family," says Tehan.

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Bankrate.com's editorial, corrections policy Updated: Dec. 30, 2015

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13 Comments Bankrate, Inc. 1 Login

Recommend 9 Share Sort by Newest

Join the discussion

Linda 3 months ago

10% of savings from your income is not bad. It would be helpful if you pay for cash
as well. The more you use your credit card, the more you are likely to get into
debt. Disciple yourself in using credit cards. Know when to use it for emergency
cases only.
Reply Share

Bozo. a year ago

35% of home and gas & lights and all. Get real.... Try more like 50%+ unless you
want to live in a total dump.. Just a fact....
Reply Share

Steve Vinzinski a year ago

Certainly great advice by the author.Well prepared article.Many wonderful
comments on this board.The problem is the unknown as I have said before my
wife and myself consume over twenty prescriptions a day.We pay for our
premiums and many generics are not covered by our company.We pay everything
in medical costs $50,000.00 in a recent year.The GAO is estimating $100,000.00
in eight years of course we both have multiple medical conditions.You can not
prepare a budget with these isues prevailing over your head.Every body a happy
New Year.
Reply Share

Andy a year ago

Make sacrifices and sell the things laying around the house. We all have at least
$1,000 worth of items we can sell via craigslist or ebay to make some quick cash.
We also can cut out so much excess and ask for bills to be reduced to save
money. The more tactics we pile up on each other, the faster we can get out of
debt and build abundant wealth.
Reply Share

Cara Li 2 years ago

1. Try not to live paycheck to paycheck. Plan for life sucking at times.

2. Try to have six months of budget saved up.

3. If married, or have children, get life insurance.

4. Try to enter into retirement debt free. You can save on things like gym (at Planet
Fitness) and car insurance ($24/month at 4AutoInsuranceQuote). Try to cut back
wherever.

5. Look at your family medical history. Average out how long your ancestors lived.
Add 5 years to that average. Is it 68? 75? 92?

6. Now, plan to have what ever your budget is plus a 5% increase per year. If you
have a 2k monthly budget now, that is 24k per year. Multiply that times an extra
5% per year. Finally, multiply that for how long you intend or think you will live.
Me? My number is 144k (2kx12monthsx6years)(average family death=66 so I go
to 71 (if I retire at 65).

My number will rise with inflation.

Now, this notion that we all need to save (or invest in 401's) 1 or 1.5 million dollars
is what the BANKS want you to do.

7. What do I do with the rest of the money? LIVE LIFE TO THE FULLEST
EVERYDAY YOU ARE ALIVE!!!!!!
Reply Share

tomtul2 Cara Li 8 months ago

White middle class Americans life expetectancy is about 84, not 71.
Asian Americans are even higher at 87 years! (The highest in US).
You have to pay taxes on money that comes out of a 401k.

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