After the strain of an unusual year, many people are hoping to start the new year off right, beginning with their financial health. If your finances have felt out of your control or if you experienced changes to your income, expenses or employment, the time to begin a smart budgeting and savings strategy is now.
Whether you’re ready to eliminate debt, begin an emergency savings fund or grow your savings and prepare for a home purchase and major move, here are simple budgeting tips and savings strategies that work.
If you don’t have an emergency fund, now is the perfect time to start. Without a savings fund, emergencies will repeatedly sideline your goals. An emergency fund of approximately $1,000 kept in a simple savings account will cover you for those unexpected expenses, like car repairs, medical bills, pet care or changes to your income.
If you already have an emergency fund going, aim to save up to 6 months of your salary to help keep you covered should you experience changes to your employment. This will keep you protected from potential financial hardship and credit card debt, should major financial changes or hardship arise.
Track Your Spending
To really budget and save, you have to keep a close eye on your spending. It’s important to know how much money you have, but it’s equally important to know where your money goes. Try tracking your spending week to week to begin by using a simple app like Mint or EveryDollar.
Each week, take thirty minutes to evaluate your spending, making note of where the bulk of your excess dollars go. Create line items for fixed spending items each month, including rent, car payments, gasoline, groceries and utilities. If you have credit card debt, include this in your spending tracking, as well.
Set Savings Goals
Before you begin saving, think about your true financial goals. Are you hoping to save to buy a house, pay off your car, travel, retire early, pay for college, etc? Knowing where you want your savings to go will help motivate you to do the work, and it will help you to more clearly define how much money you want to set aside each month to feed your fund.
When setting goals, you’ll want to think in both the short term and the long term. Define a few short term goals to get you started, with a long term goal in mind to lead up to.
A hard and fast rule for budgeting and saving is the 50-30-20 rule. In this model, 50% of your income goes to essential expenses, 30% to discretionary expenses and 20% to savings. This can be an aggressive savings strategy, but it’s one that pays off quickly. Not only does this method help you improve your finances in the long term, but it will help you to see exactly how and where your money is spent.
Managing debt while trying to save can be challenging, but it isn’t impossible. Think of debt as a true barrier to your savings goals. The sooner you can eliminate it, the sooner you’ll start saving more.
To begin, work on setting aside an emergency fund of $1,000. Once you have a small savings fund, try to put as much of your discretionary income as possible toward your debt each month. This might mean cutting back on eating out, shopping and traveling, but it isn’t forever. Once you’ve paid down debt, you’ll be able to enjoy more of your discretionary income while saving more each month-a win-win for your financial health.