Creating a budget doesn't have to be scary. Here's step 1.
Step one to smart personal finance is making sure you鈥檙e spending your income wisely. But that can be difficult if you don鈥檛 have a good grasp on where your money is going.
The solution is setting up a budgeting system that tracks your income and expenses and helps you identify your financial priorities.
For many people, the idea of paying attention to every dollar can be daunting 鈥� but it doesn鈥檛 have to be, says financial advisor聽.
We asked her to offer tips on taking the first steps toward聽聽and to discuss the positive snowball effects that can result.
What鈥檚 the first step you聽should take if you聽don鈥檛 have a budget?
Sometimes people put off making a budget because it seems so complicated. It doesn鈥檛 have to be. Creating a budget can be a simple back-of-the-envelope estimate in which you count up how much money comes in each month and how much goes out. Just getting an idea of where you are is a great start. It doesn鈥檛 have to be exact.
Take a look at your income after taxes and any automatic deductions like insurance or retirement savings plans. Then list your monthly expenses, and estimate how much you鈥檙e spending on other things, like shopping and entertainment.
From that you鈥檒l have a general sense of what you鈥檙e spending and about how much extra is left over 鈥� or how much you鈥檙e short. Once you start keeping casual track of your cash flow, you鈥檒l be encouraged to make changes that will improve your financial situation.
A fancy, perfect budget isn鈥檛 necessary or reasonable for most of us who can barely pull our records together once a year for doing taxes, much less write down in specific detail everything we spend money on 365 days a year.
Simple awareness goes a long way.
How can a budget help聽your personal finances?
A budget gets you to plan what you鈥檙e going to spend and keep track of what you actually do spend. Its collateral function is to wake you up to the fact that you may be spending too much, often on frivolous things 鈥� like Starbucks and shoes, in my case.
Being aware of your spending is crucial to reducing your spending. Many of your expenses, like rent or a mortgage, are non-negotiable, but you can rein in others if you鈥檙e paying attention. Even informal budgeting will help make your financial life better.
What kinds of聽accounts should you use?
It works best to use a聽聽to pay your monthly bills and a聽聽to hold your聽聽and other savings. That savings account can function as protection if you accidentally overdraw your account, but it鈥檚 separate from your checking account so that you don鈥檛 use it for things you haven鈥檛 budgeted for. As the balance in your savings account grows, you can consider moving some of the money to an investment or retirement account.
聽is a certified financial planner and fee-only investment advisor with聽聽in Aiken, South Carolina.
This story originally appeared on .
