Budgeting. Did you cringe? Most people do. It’s because we’ve been programmed to believe that budgeting implies cutting back. Tightening the belt. Like a diet for our finances. And where’s the fun in that? But the truth of the matter is that budgeting isn’t about restricting—it’s about reallocating. It’s about tracking our finances to become smarter spenders. Money is to spend, after all.
So just how exactly do we create a budget and stick to it?
Step 1: Know What’s in the Bank
The first step to organizing your finances is to see what you’ve got. This includes monthly income, savings accounts, investments, retirement accounts, and more. Figuring out how much you have to work with and where it’s coming from will better help you pinpoint your financial weaknesses.
Step 2: Get Your Head Above Water
The next step towards financial freedom is paying off debt. If you are paying off multiple credit cards, focus on the one with the highest interest rate first (while continuing to pay the minimum on the other cards), and then tackle the one with the next highest rate. While this is the most budget-friendly method, some experts suggest that paying off the card with the lowest interest rates first will give you the psychological nudge you need to pay off the rest.
Step 3: Automate and Allocate
Use the tools and calculators on sites like Quicken and Mint.com to help you visualize how much you are spending and where, and more importantly, how much you should be spending. The big take-away? Be realistic. Huge changes or cutting back drastically won’t last for the long-term. Small, bite-size steps will. They are easier to swallow, and as a result, you’ll be more likely to stick to them.
Next, begin automating your accounts so that your paychecks are directly transferred into your checking, savings, and retirement accounts without you even thinking about it.
Step 4: Be a Smarter Spender
These days, overspending with credit cards and racking up debit card overdraft fees is far too easy. Be financially smarter by swiping less and avoiding ATMs. Try withdrawing a set amount of cash at the beginning of every month and then use this—and only this—to pay for items like groceries, clothes, and food.
Better yet, send money online (or receive money) as a way to manage how much you’re spending and where (and which expenses you can cut). The added benefit? Avoid all those hefty bank fees that you can accumulate from various money transfers.
Step 5: Save, Save, Save
Image via Flickr by Alan Cleaver
Set both short-term and long-term goals, and start saving. Having something concrete to work towards is a great way to keep yourself accountable. If you’re planning for a wedding in the next five years, open a high-yield savings account (like Capital One 360). If you’re saving for your children’s education, start a tax-friendly 529 college savings plan. For those planning for retirement, open a 401(k) or Roth IRA.
Most importantly, leave room for adjustments. Making small tweaks to your financial plan are not only normal, they are necessary to reaching your financial goals. So take a breath, accept it as a process, and adjust accordingly. The key is to start somewhere. With a little organization and planning, you can be well on your way towards reaching financial freedom—and future success!