Looking to improve your money management skills? Get to know the three keys to financial freedom: budgeting, careful debt management and saving. Through careful planning you can learn to live within your means – all while reducing debt and saving for the future.
Determine Your Monthly Income
The first step to preparing an effective budget is knowing your total monthly income. To do this, you’ll need to calculate your net income. Your net income can be calculated by subtracting your expenses from your gross income.
Keep Thorough Records
Your net income is just the first piece of the budget puzzle. You need to be able to track your expenses and identify ways in order to reduce them. The keys to tracking your expenses include:
- Keeping your checkbook up to date
- Keeping a list of out-of-pocket expenses
- Tracking your credit card purchases
- Having an organized filing system
Monitor Spending
Most people who have problems with money have no idea how much money they’re spending – that is, until it’s gone. Keeping track will help you to better understand where your money is going. In order to do this, you’ll need to know the difference between fixed, variable and periodic expenses.
Fixed expenses are expenses that remain the same from month to month. For this reason, they’re the most difficult to reduce. Fixed expenses include mortgage and car payments.
Variable expenses change from week to week, which makes them the easiest to reduce. Variable expenses include groceries and utility bills.
Periodic expenses come up once or twice a year. They include vet bills, clothing, prescription glasses, dentist bills, etc. With periodic bills the key is to comparison shop in order to reduce costs.
If you’re able to identify and track your spending, you’ll be well on your way to staying within a carefully planned budget.
Creating a Budget
The only way to manage your finances is to budget. Budgeting can be difficult, but it’s key to attaining your financial goals. A good rule of thumb for budgeting is to make sure that your debt load does not exceed 20 per cent of your monthly net income. Remember that your net income is calculated by subtracting your expenses from your gross income. Once you add in your rent or mortgage, the total shouldn’t exceed 40 per cent of your monthly income.
Reduce Debt
Once you’ve looked over your debt, your monthly income and your monthly expenses, you should have a better sense of where you stand. Now it’s time to think about your long-term goals.
- When would you like to be debt-free?
- How are you going to manage your debt?
- What steps are you willing to take to ensure that you stay on track with your goals?
Now is the time to develop a plan for reducing your current debt load, while avoiding racking up more debt in the future.
Save for the Future
Once you’ve got your debt under control, you should begin to regularly set money aside into a savings account. Regular saving is a huge part of money management – especially for the long-term. With savings, not only will you feel secure about your future, you’ll also be able to better manage unexpected financial surprises. To meet your savings goals, develop a savings plan that includes short and long-term goals. Set aside the budgeted amounts, as well as those necessary for an emergency fund. If you have extra money left over from the funds set aside for your expenses, put this into a savings account as well. You never know when you’ll need it later.
Good luck with your money management plan!
