Financial literacy continues to be a major area of concern nationwide. Many Americans struggle to pay their bills and balance their books, mostly due to a lack of knowledge on the subject.
Consumers must take control of their own finances and find a way to both satisfy their debts and (hopefully) foster their savings. If that sounds like a tall order, at least you know you’re far from alone. In fact, a report from the National Endowment for Financial Education found that only 24 percent of millennials demonstrated basic financial literacy.
Ending the cycle now is your best chance for improving financial stability. Let’s take a look at where you can begin.
Crunching the Numbers
The first step to building a budget is to determine specifically the income and expenses you’re dealing with. Begin by calculating your after-tax income. This may simply be what you receive in your usual paycheck, but don’t forget to factor automatic deductions for retirement savings and insurance into your finances. From there, you’ll decide on a budgeting plan. One popular option is Elizabeth Warren’s 50/30/20 rule, which designates half your income to needs, 30 percent on wants and at least of 20 percent on savings and debt repayment.
Once you have a plan, you’ll need to track your progress using budgeting tools (some of which we’ll discuss later). Automation is a tremendous tool that makes maintaining a budget much easier for modern consumers. Take advantage of this capability so that you don’t have to stress over whether your budget is progressing as planned. Then, periodically check your work. Remember, you’ll have to update your budget every time your income or expenses change.
The Tough Decisions
Even when you have the basics laid out, you still need to keep your financial priorities straight. Here’s the breakdown of how to effectively do that.
Retirement: Outside of living expenses, your retirement savings should be among the most important elements of your finances. While it may seem far off, you can’t prepare enough for the future, especially when you never know where your career will take you.
Credit card debt: Thanks to the interest rates, getting out of credit card debt is often easier said than done. But you need to make this a short-term goal, as it will alleviate a financial burden and boost your credit rating at the same time.
Emergencies: In life, the unexpected is bound to happen, and you and your family need to be ready for it. That’s why keeping even just $1,000 – but ideally more like months’ worth of living expenses – in a separate account strictly for emergencies is key.
Irregular expenses: These aren’t monthly living expenses, but they’re not quite emergencies either. We’re talking about household fixes, automobile repairs and the like. These expenses are more irregular but need to be accounted for just the same.
Goal-setting: If you and your family are saving up for something specific, this is the category where that money would go. Whether it’s a vacation, a new car or an upgrade to your home, it’s imperative to factor these long-term objectives into your budget.
Building Your Toolbox
As you reframe your spending, you’ll still need some assistance in the shape of a few vital tools to support your new budget. Here are some basic resources you’ll want to have in place.
Immediate accountability: You need to act immediately to keep yourself on track. The solution could be as simple as jotting down every bit of money you spend in a notebook, or you could try out the envelope system advocated by financial author Dave Ramsey. The most important part is that you build a sense of self-awareness into your spending. It’s far too easy to swipe your card and ignore the consequences.
Spreadsheets: It may sound basic, but a solid spreadsheet may be your most valuable tool in building your budget, since it provides the structure and organization you need to keep yourself from overspending. Even if you have more sophisticated systems in place, you’ll want to have a financial spreadsheet on hand, if only to get you started.
Budgeting software: There are a number of good software options to choose from, but one worth calling out is You Need A Budget. Basing your budget on the previous month’s income rather than looking ahead, YNAB takes a more practical approach than many of its counterparts.
Mint: We live in the smartphone age, and Mint has emerged as a leader among mobile budgeting applications. All you do is input your data – everything from banking and credit to investment accounts – and the app takes it from there. You can rely on automation to track your spending habits and even set budgeting goals for various expense categories. Mint will identify trends and help you adjust as necessary.
Put the Work In
No matter how much advice we share about how to build your household budget, none of it will matter unless you put it into practice. Financial matters are a game of discipline and patience, and you’ll need to remain consistent to have a lasting effect on your bottom line. The end result may lead you to more prosperity. Keep that objective in mind as your system takes hold.
If you’re looking to give your budding savings more of a boost, consider the AAA and Discover deposit program. You’ll have four high-yield savings products to choose from, all of which can help to maximize your savings account and speed up its development.