Living on a budget takes discipline and a certain degree of sacrifice, but with the right guidance, you can make the most of your income and still have a fulfilling life.
You’ll need to calculate your expenses and plan your life around these numbers, but it can help you balance your short-term and long-term finances, giving you a more stable life, regardless of the number on your payslip.
The first step, experts say, is to calculate how much money you have left after tax each month. Once you know that, there are smart ways to organize and prioritize your spending.
What is budgeting and why is it important?
Kavita Kamdar, executive director of community and business development at JP Morgan Chase in New York, explains that budgeting simply means creating a plan based on calculations of your income and expenses, helping you track your finances.
The ability to budget is useful regardless of your age and career stage. “Whether you’re just starting out or you’re a seasoned professional, budgeting can benefit everyone at all stages of life. Consider budgeting the cornerstone of better financial health,” Kamdar said.
How to manage your income: budgeting techniques and expert advice
Ashley Tran, assistant branch manager at Fidelity Investments in Tampa Bay, Florida, recommends the 50/15/5 method for organizing your spending and savings.
As Tran explains, 50% of your after-tax income should be spent on essential expenses like rent, utilities, health insurance, and groceries. After paying those unavoidable bills, you’ll still have half of your available budget, but it’s important to plan ahead. Regardless of your age, you should contribute to your retirement fund.
Tran suggests setting aside 15% of your pre-tax income to fund your retirement. If you’re in your twenties, that might seem like a high percentage, but you need to prepare for a long retirement. Although the average life expectancy in the United States has decreased in 2020, due to COVID-19, the long-term trend is upward for both men and women.
Another 5% – at least – of your income should be put into an emergency fund, so you can meet unexpected expenses without going into debt.
The remaining 30% is for you and your non-essential needs such as vacations, restaurants and personal care, especially after we were denied such treats during the pandemic.
Kamdar said, “An important key to managing your budget is understanding where you are at with your money knowing what comes and goes each month, so any disposable income you may have.”
Once you know this, you can set your budget and start building a safety net. “An emergency fund can provide peace of mind to deal with life’s unexpected surprises,” she said.
Kamdar advises people to have a plan in place and be intentional about financial decisions. She also recommends frequently reassessing your budget to see if any new trends emerge or if you need to make adjustments. Your financial plan should evolve with your life.
Mauricio Vaca, a certified financial planner in Denver who works as a senior advisor and private client group manager at Personal Capital, advises with a focus on savings and investments.
He said Newsweek A good place to start is to set up automatic contributions into a 401k employee retirement plan. “Apart from a 401k, a few other great places to start saving are Individual Retirement Accounts, Roth IRAs, and Health Savings Accounts, due to their tax advantages.”
Vaca believes that investing is the best way to allocate your money, but it will depend on your perception of risk.
“Someone who is younger and has a higher tolerance for risk can shift their portfolio to equities, while someone nearing retirement does not have a high tolerance for risk or [doesn’t have] the ability to take on so much risk due to their age may necessitate shifting their portfolio towards fixed income investments. »
He suggests using low-cost funds and diversifying your portfolio so you’re not investing in just one part of the market.
Before you start, you need to understand the difference between trading and investing so that you can define your investment strategy and stay disciplined about it. “Trading is generally speculative with a shorter time horizon. Investing should be less speculative with a longer time horizon,” Vaca said.
Ken Fisher, Founder, Executive Chairman and Co-Chief Investment Officer of Fisher Investments, believes there is no magic trick to budgeting and it’s all about discipline.
His advice is simple. “Save, save, save. Save now, save big, keep saving and invest passively through the S&P 500 in the stock market and don’t touch it until you’re old and need to cash out to spend it,” he said. .
Passive investing means holding investments for a long time, minimizing buying and selling. According to Fisher, you shouldn’t “wiggle” with your pot, but keep it on a steady path.
He added: “If you want to get fancy and try cute and dainty things, don’t do it. If you think you’re smarter than everyone else, you’re not. If you want a result easy, you’ll end up old and poor.”
What is zero-based budgeting?
Kamdar describes zero-based budgeting as allocating all of your income to specific categories until there is no money left, as in the 50/15/5 method described above.
This approach is great for keeping you from spending what you don’t have, she says, but there are plenty of other budgeting techniques. If a zero-based plan isn’t for you, find one that better suits your needs.
Kamdar added, “As long as you follow through, are proactive and put in the effort, it’s a huge first step.”
Are budgeting apps worth it?
Budgeting apps often promise to simplify your life and make your calculations easier. But do they really work?
According to Kamdar, digital banking and budgeting apps can help you take control of your finances, allowing you to view your current financial situation with the click of a button. “Budgeting apps and digital banking make it easy, so why not take advantage of them?” she says.
Tran has a somewhat different view. She said, “While budgeting apps can be a useful tool to get started, we’ve found that many people tend to prefer guidelines, which provide structure, but also flexibility to adjust. This allows you to customize to better suit your budgeting methods and behaviors, ultimately helping you stick to your budget in the long run.”
If you’re looking for ways to reduce your expenses, Tran suggests reducing recurring expenses such as monthly subscriptions and subscriptions you don’t use regularly.
“There are also ways to make small changes to your daily routine to save that extra money, like reducing the amount of electricity or energy you use, or cooking more meals at home. These small changes can add up. overtime!”
If you’re getting into investing, Vaca recommends reading books and articles and listening to podcasts on the subject. “Build a solid foundation so that as your accounts grow, you have a better understanding of how they are invested, the tax impacts and the risks you take.”
The content of this article is for informational purposes only and does not constitute financial or investment advice. It is important to do your own research and consider seeking advice from an independent financial professional before making any investment decisions.