Welcome to this week’s edition of our Tuesday Top 5, our weekly tips post to help you manage your money in five easy steps.
In honor of the newest addition to Econ4U’s Money Matters section, today’s tips center on how to make — and stick to — a realistic budget. If you don’t have a budget or if it’s been a while since you’ve updated the one you do have, here’s the easy way to get yourself on the right track:
- Get yourself some goals. Ideally, these will be things you want more than the things that make you fritter your money away now. Think short term (like saving for the new television or laptop that you want to buy in the next few months), mid term (up to three years in the future, so things like cars or a down payment on a home), and long term (such as retirement or college tuition for your kids).
- Review your income. For most people this is easy to determine – what is your monthly takehome pay after taxes? It gets trickier if you run your own business, have some freelance income, or work on tips or commission, but ultimately it should be your best estimate of the total income that comes into your bank account each month.
- Examine your financial commitments. Now that you know what you’re taking in, what are your monthly obligations? Categories that belong in this column would include not just the essentials like your rent or mortgage, insurance premiums, groceries, and utilities, but also entertainment (like movie tickets and dinners out), shopping, hobbies, and travel. Honesty is key here — ignoring money spent on the things you enjoy is a guaranteed way to torpedo your budget’s usefulness.
- Identify areas where you can save. This probably isn’t as hard as you think. Clearly you have more control over your spending in some of these categories rather than others. For example, shelter and utilities tend to be fixed expenses, while entertainment and cash tend to be variable expenses – things you can control in the short term. Ask yourself whether you’re too often withdrawing cash from out-of-network ATMs and getting dinged with fees every time. Or if you’re spending too much on taxis or gas instead of relying on public transportation.
- Pay yourself first. Put the money you plan to save each month in a separate bank account and make a promise to yourself not to touch it. Don’t approach your monthly expenses with a “save whatever’s left over” mentality. Often at the end of the month, there isn’t anything left. The easiest way is to transfer money directly from your paycheck or out of your checking account — if you don’t see it, you won’t miss it as much.
It really is as simple as this, folks. A little planning goes a long way toward financial freedom.
