One of the challenges with proper budgeting is that it
has to become habitual in order to be effective. You can survive without
knowing how to budget if you manage to keep more money coming in rather than going
out or have credit cards to cover the gap, but this won't last forever.
Emergency
Fund
The crux of this six-month plan is the
emergency fund. Ideally, everyone should have at least one or two months' wages
sitting in a money market account for any unpleasant surprises. This emergency
fund acts as a buffer as the rest of the budget is put in place, and should
replace the use of credit cards for emergency situations. You will want to
build your emergency fund as quickly as possible. The key is to build the fund
at regular intervals, consistently devoting a certain percentage of each
paycheck toward it and, if possible, putting in whatever you can spare on top.
What's
an Emergency?
You should only use the emergency money for
true emergencies: like when you drive to work but your muffler stays at home.
Covering regular purchases like clothes and food do not count, even if you used
your credit card to buy them.
Downsize
and Substitute
Now that you have a buffer between you and
more high-interest debt, it is time to start the process of downsizing.
It’s
odd that the natural solution to "not enough money" seems to be
increasing income rather than decreasing spending, but this backwards approach
is very familiar to debt counselors. The more space you can create between your
expenses and your income, the more income you will have to pay down debt and
invest. This can be a process of substitution as much as elimination. For
example, if you buy coffee from a fancy coffee shop every morning, you could
just as easily purchase a coffee maker with a grinder and make your own, saving
more money over the long term.
Focus
on Rewards
Another trick that will help your budget
come together faster is to focus on the rewards. A mixture of long- and
short-term goals will help keep you motivated. This can be as simple as saving
for a small luxury, or even something bigger like buying a car with cash.
Watching these goals slowly but surely become a reality can be very satisfying
and provide further motivation to work harder at your budget.
Find
New Sources of Income
Why isn't this the first step? If you
simply increase your income without a budget to handle the extra cash properly,
the gains tend to slip through the cracks and vanish. Once you have your budget
in place and have more money coming in than going out, you can start investing
to create more income.
Now, it is possible that it will take you
more than six months to get your budget balanced out as it all depends on your
situation, including how much or what kind of debt you have. But, even if it
does take you longer than six months to get your budget turned around, it is
time well spent.
(Source: Investopedia.com)
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