- Not having a budget is one of the leading causes of financial stress.
- Good budgeting comes down to having a handle on your income coming in and your expenses going out.
- I have three simple but powerful rules for budgeting (see below and related video above).
One of the leading causes of financial stress is not having a budget. Financial stress can really take a toll on your health and your peace of mind, and is the leading cause of failed marriages. When it comes to budgeting, I have three important rules for you:
- Failing to plan is planning to fail.
- Use OPM (other people’s money) rather than your own.
- Prioritize by taxation. That means look for tax-deductible, tax-deferred or tax-free options first before committing to a taxable option, regardless of what the money matter is.
What’s budgeting all about?
First, we have controllable expenses. We get out of college and into the real world. We can control our housing, our transportation and our debt, or at least taking on new debt. If you’re already out in the real world and you’re in a position in which you have your house and your transportation, you’ve got debt. That means you have to do a reset here. These factors are controllable expenses. You want to reduce your housing costs as far as possible. It could mean living with your parents, having multiple roommates or living in a very small space. Do whatever it takes to keep living expense down. When it comes to transportation, consider biking to work, walking, using public transportation or buying a used car. Certainly don’t go out and buy a new car and add more debt to your load.
There are plenty of online tools you can use to help you with budgeting. Go to Mint.com or Quicken for instance. Also, our firm has a handy Excel spreadsheet you can use for budgeting. You’ll soon see that budgeting is all about monitoring the income coming in and the expenses going out. Focus on the expenses you can actually control.
Next, you want to establish an emergency fund. We like to see three to six months’ worth of living expenses set aside, but even if you can set aside just $1,000 or $2,000, that’s a start. Next, start to save (my favorite). If you have a 401(k) plan at work, definitely take FULL advantage of it. Why? It hits on all three of my rules: (a) you’re planning to save, (b) you’re using other people’s money and (c) you’re prioritizing your taxes.
Many companies will match you 50 cents on the dollar in their 401(k) plan, typically giving you an additional three to five percent of additional savings that accumulates tax-deferred over your working life. It’s a great way to start moving your savings along, after you’ve built your budget. A good benchmark at your age is to save 15 percent of your income. It will make you a much better saver and investor down the road and substantially reduce your stress. Having a plan in place, having a budget in place and following your budget makes a huge difference.