When people hear budgeting, they think:
– A hassle
Let’s do away with that paradigm and get you on the path to financial freedom.
It’s time to set up your financial life so that you know exactly where you stand and what is available to you.
In this post we’re going to go over how to manage your cash flow, budget, and automate your savings.
Maybe budgeting will never be as ‘fun’ as rolling the dice on the next $GME, but it’s definitely important.
First, we want to start with measuring your take home pay. This can be achieved by taking a look at your paystub and checking your net pay. Let’s say you’re paid twice per month, so we need to double the net pay from that one paystub. For this example, let’s go with that number being $5,000.
Next, we need to find out what your average monthly expenses are. This can take some work, but it is necessary. You’ll either need to link your bank statements to an app like Mint, or you’ll need to break down each expense and categorize it manually in something like Excel or paper and pen.
We’ll need to do this for a few months of expenses and average it out. Let’s say your average across three months is $4,250, for example’s sake.
This will lead us to our most important number: surplus – what’s left over. This number is calculated by taking that monthly take home pay, less your average monthly expenses. In the example above, this would equate to $750 of surplus per month.
So, what do we do with this surplus?
Well, first off, we need to make sure we can weather some storms. This is where your emergency fund comes in. Your emergency fund should have 3-6 months worth of monthly expenses saved up. The amount of months you’ll need will usually vary based on your profession. If you have a very secure job like being a teacher, for instance, it might make sense to go for a lower amount like 3 months. If you are a contractor or a seasonal employee, it probably makes more sense to go for 6 months of savings.
Going back to the example above, let’s say you’re a teacher, and you have a surplus of $750 per month. It’s important to fully fund your emergency savings account. For 3 months, you’d need around $12,750 in that account. Once you have built up this account, it’s time to take a look at your financial goals.
Do you value travel? Are you saving for a new car, or a house? Do you have children that you want to send to college? All of these things we can begin to plan for with this surplus.
So, the last component is to automate your savings.
This begins with setting up dedicated savings accounts for the things you want to achieve. Then you direct transfers to those accounts every pay period. This is a set-and-forget strategy. You won’t need to worry about keeping track of these savings in your head or having everything accumulate in one account any longer.
There is so much more to consider along your financial journey, but taking these steps are a great way to begin getting ahead. Join us next week, for a lesson on other budgeting strategies.