Get ready. We’re about to get deep. Have you ever thought about what means, means? Yes, you can think about it for a moment…back now? Good. As a noun, it can be two things. It can refer to an action or system by which a result is achieved, or it can refer to income. Now, taking it a layer deeper, you need a means (a system) to live within your means (income). See how that works? Well, that’s what we call a budget and we’re going to show you how to set one up for step two of our 12-part series on living with greater financial and emotional confidence. Sounds basic? Well, 2/3 of Americans claim that they are not good at living within their means yet they prioritize building savings for long-term goals.* How do we close that gap? Let’s get back to the basics.
1. Acknowledge Your FUD**
First, you have to overcome the big three psychological barriers that keep many people from setting up a budget: Fear, uncertainty, and doubt.
- Fear what you’ll discover when you examine your finances
- Uncertainty about how to set up a budget
- Doubt whether you can stick to a budget
2. Track Your Income and Expenses
Don’t guesstimate how much money you have coming in and going out each month. Write it down. There are lots of tools to help you, including this great worksheet and—bonus—it’s free. Keep track of all your expenses and sources of income. Some experts suggest doing this for a few months to get a real picture of your financial situation, but starting to track for just a month will help you get some clarity. Even easier, scan your bank and credit card statements to see where it’s all going. Add up the expenses and subtract them from your income. This will tell you, at the most basic level, whether you are operating in the black or red.
3. Begin to Build your Budget
A successful budget enables you to meet your financial obligations and grow your bank balances to achieve those magic life goals. A useful concept is the idea of paying yourself first. Make sure to pay your mortgage or rent, insurance, loans, and credit card bills to avoid penalties and increased rates.
As part of the paying yourself first philosophy, also begin to build your emergency fund with regular contributions to protect yourself and anticipate unexpected costs, such as car repairs, medical bills, and emergencies. The rest of your monthly income can then be put toward regular living expenses.
Next, record your actual income and spending, and spot the areas that need attention. If you need to cut expenses, it may be helpful to:
- Rethink your digs: We often think of housing as a non-negotiable but, the truth is, you have options on how much you’re spending here
- Examine current bills: See where the money is going and think of cutting out extras and finding cheaper alternatives
- Pay with cash: There’s something about the tactile quality of cash that makes it hard to part with
- Adjust your habits: All of us have habits that we fall into that can be revised and made more financially healthy
At this point, some people find it helpful to consult with a financial representative. He or she can look at your numbers and help you put together a balanced budget that addresses all your needs, from meeting monthly obligations and saving for retirement to occasionally splurging.
4. Integrate Your Budget
More and more people are using mobile budgeting tools on their smartphones and tablets. According to a USA Today report***, individuals who use budget apps frequently, at least once a day, say the tools make them less likely to overspend.
Lastly, review your budget regularly to make sure it continues to fit your life. Best-case scenario? You’re accumulating so much money you can begin putting more aside to reach your life goals. It can happen. Really. Greater confidence is just around the corner. But first, you need to cast FUD aside and get down to the business of creating the means to live within your means.
* Guardian's Living Confidently survey, 2017.
** FUD tends to creep up a lot on those who lack financial confidence. To find your level of financial confidence, we encourage you to take our quiz here.
Brought to you by The Guardian Network © 2017. The Guardian Life Insurance Company of America®, New York, NY.