People at all ages have trouble budgeting their finances and really who can blame them. Money is something that is made to be spent after all and balancing necessities and desires with time and funds can be a challenge. If one spends too much it can lead to a serious drain in funds however never spending at all can lead to a common yet serious disorder known as stuckupocous cheepskate syndrome which can be deadly to both ones person and their social life. But balancing our life between these two issues is a goal many of us fail to achieve. Well there are a few key steps to help in this process of which I will go over.
STEP ONE: Knowing What you Need, and how much that costs
This step sounds simple enough though may take some time to truly get the figures right. It is exactly what it is saying and it is best to do in about a monthly interval. If you can accurately manage to account for a years time, that can work as well, but the larger the time interval gets, the more difficult it becomes to be accurate. Even budgeting for a day can oftentimes be difficult. In this category, you are going to what to include items like:
- Health Costs
- UNEXPECTED COSTS
“Unexpected costs” is a category that accounts for things like car damage and repairs that don’t occur frequently. You are going to want to set so much money aside per month to cover these occurrences and if it turns out it doesn’t get used, than you have a little extra for the following month, which never hurts.
STEP TWO: Setting a limit to money spent on fun
Again, this sounds simple enough, but can be a great challenge for some people. You may even want to consider setting an inverse limit here, ensuring you don’t forget to have fun. (If you can afford it, you SHOULD spend at least a little bit). Setting a limit to the amount of money you spend can make sure your savings is saved. This is especially important if money spending itself is in your category of fun. Experiences such as gambling will bankrupt you if you don’t set a limit. Even just going on a shopping spree can cut into your bank account way more than you might like, so having a set limit is nice to protect yourself from impulse. If you are going to break this limit, it should not be done on the spot, but should be done over a nights time so you can make sure it is something you want to do.
STEP THREE: Total money / Total months = (Step one + Step two)
OH NO MATH!!! Don’t be afraid, it’s relatively harmless and really not hard to do. This is where the real budgeting comes in and where retirement planning is important. The first step here is figuring out how long you want your money to last. If you would like it to last until you are 125 years old (just to be safe) then use that number to set a time. Let’s say that is 50 years away still. So 50 x 12 = 600 Months. If you have 600,000 dollars then you have 600,000/600 = $1000 a month for budgeting to last you until you are 125 years old.
This math does not include inflation or any additional income you may receive via investments or work, however is working on a strict spending bases (which is silly, you should have investments). However, for the basis of understanding simple budgeting this will do, even if you are only budgeting for a week. Step one and step two are always good to be able to figure out in any situation and can really help to make sure you don’t end up broke after a vacation.