Nearly 75% of American adults report that they don't regularly follow a budget, while 10% have no budget at all.1 A lucky few may earn enough, or have low enough expenses, making budgeting unnecessary. But for the rest of us, the process can be a key tool in helping improve finances. Here we discuss four tips to help take some of the fear out of budgeting.
Visualize Your Goals
Do you want to take more vacations? Retire early? Make large purchases without stressing about being able to afford them? Send your kids to the college of their choice? Purchase a home or rental property?
Once you have identified these financial goals, work backward by designing a budget to build toward these goals. If you want to retire early, you may need to boost your retirement savings rate. If you would like to beef up your kids' college fund, consider investing in a 529 college savings plan.
Take Small Steps
Breaking down larger, long-term goals into smaller steps can be vital to making them feel achievable. For example, a goal of “pay off all my credit card debt this year” can seem overwhelming. How about committing to paying off the card with the highest interest rate first? This can feel more achievable. These small victories along the way can help reaffirm your commitment to your goals.
Track Your Spending
Fear of the unknown can be nearly paralyzing when it comes to creating a budget. You may worry about discovering how much you have been spending or where your financial shortfalls are.
However, if you are not entirely sure what your financial situation looks like, it is hard to improve it. Tracking income and spending for a few months can give you insight into your financial habits. There are plenty of apps that can help!
Design a Budget that Works for You
There is no “right” way to draft a budget—the best budget for you is one you can easily track and stick with. Some options include:
- A 50/30/20 budget, which designates 50% toward fixed expenses, 30% toward entertainment, and 20% toward savings.
- A zero-based budget that ensures every dollar is accounted for at the end of the month, through spending along with short- and long-term savings.
- An “envelope system” in which you put certain amounts of cash in an envelope (or a bank sub-account) for each budget category. Once the envelope runs empty, that is it for spending in that category until the budget resets next month.
- A pay-yourself-first budget that prioritizes savings by making automatic transfers to a dedicated savings account.
Whether you use one of these budgets or combine elements into a system that works for you, you will be well on your way toward improving your financial life. Contact us if you have any questions or need assistance.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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1 73% of people don’t regularly follow a budget—and that’s OK, says a financial therapist, CNBC.