setting a budget

Setting a budget is necessary if you want to learn how to use money properly. If you don’t know where your hard earned money is going, you will not be able to meet your financial goals.

Learning about a few key concepts will help you make the most of your money. Use this basic financial survival guide to learn the best ways to manage your money and start saving for the future.

Setting a Budget

Setting a budget helps you stay in control of your money. Unfortunately, a Gallup Poll from 2013 shows that two-thirds of Americans do not budget their money. Without a budget, you have no idea where your money is going.

Your budget should include three major categories:

  • Fixed costs
  • Financial goals
  • Flexible spending

Fixed costs include anything that you have to pay monthly or annually. These costs usually include:

  • Rent or mortgage
  • Car insurance
  • Utilities

You should spend about 50% of your income on these fixed costs.

Financial goals include anything that will improve your household’s financial health.  These include:

  • Paying off existing debt
  • Contributing money to a retirement savings account
  • Saving money for an emergency fund

Expect to spend about 20% of your income on these goals.

Flexible spending includes any expense that change from month to month. Common expenses include:

  • Clothing
  • Entertainment
  • Gasoline
  • Hobbies
  • Groceries
  • Going out to eat

You don’t want to spend more than 30% of your income on these things. If possible, spend less so you can dedicate more money to reaching your financial goals.

The typical U.S. household has an income of $53,046 per year. After taxes, that amount probably comes to about $37,000. Based on this income, you should expect to spend about $18,500 on fixed costs, $7,400 on financial goals, and $11,100 on flexible spending.

If you do not have enough money to meet your current level of spending, then you either need to find a better source of income or reduce the amount of money that you spend each month.

Checking Your Credit’s Health

Federal law allows you to get a free copy of your credit report from each major bureau per year. The three major credit bureaus are TransUnion, Equifax, and Experian. You should take advantage of this opportunity by spreading out the reports over the year. Planned correctly, you can view your report every four months.

When it comes to your credit report, you make think you know what it covers. The truth of the matter is that you have no idea until you look. Even people who make payments on time may find that they have negative information on their reports.  One investigation showed that one in five Americans has a mistake on his or her credit report. Inaccuracies on your credit report can make it difficult to secure low-interest loans. It can also raise the cost of your car insurance and other common bills.

Checking your credit report will also help you identify ways that you can improve your score. Take a look at your existing debts and see where you could be lowering your credit utilization ratio (the amount of credit you are using compared to the total amount of credit you have available to you). Companies compare the amount you owe to the amount of credit you can access. If you have a credit card with a $5,000 limit, but you only owe $500, then you’re in good shape. If you owe $4,500 on that card, companies will want to avoid you or charge considerably higher interest rates.

Repaying Debt

If you have debt, you want to repay it as soon as possible. For this reason, setting a budget is so key.  This is especially true of credit card debt. Chances are you have high interest rates and the longer you take to pay off the debt, the more money you are going to spend.  Credit cards have an average interest rate of about 15%. If you have bad credit, the average interest rate over 22%.

For this reason, you should never make the minimum payment on your credit card bill if possible. Doing so can make it nearly impossible to get out of debt. If you owe the average $15,611 on a credit card that charges 22% in interest, it will take you about 17 years to repay the full debt. Even worse, you will end up spending over $28,600 repaying the $15,611 debt.

Minimum payments are usually 4% of your total credit card debt. Increasing your payment to 10% makes it possible to get out of debt in about 5.5 years. You will spend about $19,000 in total payments. This credit card minimum payment calculator will help you determine how long it will take for you to repay your debt.

Getting out of debt takes commitment and sacrifice. The more you can devote to repaying high-interest debts, the sooner you can start using your money to grow wealth.

Debt Consolidation

It makes sense to focus on repaying accounts with the highest interest rates. You may be able to consolidate your debts to get a lower interest rate. Consolidating debts can also reduce the total number of payments that you make each month. Instead of giving money to several credit card companies, you only make one payment.

If you choose to consolidate your debt, you will get a loan to repay existing accounts. You will not make any more individual payments toward your credit card debt. You will, however, have to repay your loan. Since the loan usually has a lower interest rate, you may have the opportunity to not only get out of debt quicker but save money in the process.  Just make sure that setting a budget is on your list of priorities if you don’t have one already.

Creating an Emergency Fund

Emergencies happen, and they can be expensive. Creating an emergency fund helps protect you against falling into high-interest debt. For instance, if your car breaks down, you can use the money from your emergency fund to pay for the repairs.  An emergency fund will also help if you lose your job or are suddenly facing high medical bills.

So how much should you save?  Most experts agree that you should save enough money to pay for three to six months of your household expenses. This may sound like a lot but by setting a budget, you will be better prepared to start making contributions towards it.  If you lose your source of income, this money will keep you afloat while you look for a new job. Without the emergency fund, you could lose your home or accumulate tremendous debt that will take years to repay.

Investing for the Future

According to Experian, One-fourth of Americans do not have retirement savings.  Considerably more people do not have enough money saved to continue their current lifestyles for more than a couple years after retirement.

Many employers offer retirement savings as part of their employee benefits. Common retirement accounts from employers include:

  • IRA
  • 401(k)
  • Simplified Employee Pension (SEP)

If your employer matches a percentage of your contribution, you should take advantage of that opportunity. Some will match up to 5% of your salary. That may not sound like much, but it adds up quickly.

You can also start your own retirement savings account. Most people who open non-employer accounts choose IRAs. There are a number of IRAs to consider, so speaking with a financial planner is a good idea.

The great thing about investing is that the money builds on itself. It’s basically the opposite of credit card debt. Let’s say you contribute $300 to an account that gives you a 5% return. In ten years, that $300 will become $488.66. If you contribute $300 every month for ten years, you will spend $36,000, but your account will have a $47,544.42 value. That means you earn over $11,000 just for setting a few hundred dollars aside each month.

You can use this investing calculator to see how much money you will make by saving whatever you can afford.

Automate your Savings

People often think they don’t make enough money to be able to save.  The truth is, most people do have the money if they actually sit down and go through their expenditures.  If you are getting lunch on the go or hitting up your local Starbucks at any time throughout the month, that is money you could be saving.  Aside from that, automating your savings is the easiest quick trick to building up a savings account.  You can’t spend what is not there.  Always pay yourself first.

Do an Annual Audit of your Finances

Every year, people should be looking at how their finances played out.  Look at your retirement savings.  Are you putting enough away each paycheck?  What do your investments look like?  Do you need to change them up?  You also need to review your budget.  Is it working for your family?  Perhaps you need to switch some things up.  Meeting with a financial advisor is always a bonus when it comes to reviewing your finances for any changes that need to be made.


Getting your finances in order can take a lot of work at first. Once you set a budget, though, you just have to follow it. As long as you focus as much money on repaying high-interest debt and saving for the future, you should find that your financial health improves quickly.

Making the most of your money will probably require some sacrifices. Eventually, you will adjust to these changes in your lifestyle. The benefits of following this basic financial survival guide are well worth the short-term discomfort of changing your habits.

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