One piece of valuable advice I can offer is to live within your means, regardless of the circumstances. Whether you are self-employed or working for a company, having a well-defined budget is crucial. I recommend saving 30% of your income, but it's important to note that everyone's budget is unique. This allows you to understand where your money is being spent and make necessary adjustments within your financial capabilities.
A budget serves as a fundamental document that outlines the sources of your income and where your money is being allocated. Many individuals are aware of their earnings but have no idea where their money is going. If this rings true for you, you are part of the majority and most likely lack a long-term financial plan, just like many Americans.
Creating a budget is a simple process that can provide financial clarity and peace of mind. Follow these four steps to develop a budget:
Step 1: Enumerate your sources of net income, which is the amount you earn after taxes have been deducted. You can find this information on your pay stub and label it as "After Tax Income" on your budget.
Step 2: List your expenses, such as rent or mortgage payments, auto insurance, utilities, groceries, and fuel. Don't forget to include minor expenses that often go unnoticed, like daily coffee, dry cleaning, highway tolls, eating out, and haircuts. A simple way to identify these expenses is to review your credit card and bank statements. You may also find it useful to use a smartphone app or have an envelope handy for receipts to track small cash payments.
Step 3: Allocate a category for emergency cash expenses, which serves as your financial safety net for unexpected costs.
Step 4: Subtract your total expenses from your total income. This calculation will reveal whether you have a surplus or deficit income.
To ensure accuracy, it is essential to work with your budget for a minimum of three to six months. This duration will provide a comprehensive view of where your money is truly going on average.
If you don't have a budget and are looking for a quick method to determine if you are overspending, monitor your bank account and credit card statements. If your bank account balance consistently increases over several months, your budget is likely on track. However, be cautious if you are not paying off your credit cards in full each month, as this can lead to accumulating costly debt instead of paying it off.
My recommendation is to create a budget, as it is well worth the effort. This straightforward document offers numerous benefits, including financial clarity and the ability to make informed investment plans. I hope this advice proves helpful to you!