As a college (and even grad school) student, I made a lot of financial mistakes, not the smallest of which was borrowing thousands of dollars for my education and living expenses and pretending it was free money.
I think there may have been a small part of my brain that understood I’d eventually have to repay the loans, but there was a much bigger part of my brain that was enjoying what I viewed as a growing bank account.
I didn’t really watch my spending, and I did whatever I wanted, regardless of the cost. And because of my outrageous lack of responsibility back then, I’m now one of the more conscientious people you’ll meet when it comes to money management and budgeting.
Still, it would have been nice to understand the value of budgeting when I was making some of the bigger mistakes of my life, which is why I’m bringing you five important things to consider when it comes to budgeting the right way.
Configure your monthly spending capability
The first step to budgeting is figuring out how much you have to spend each month. Once you calculate that number, you can then break it down into weekly spending and even daily spending.
- Calculate your total monthly income. Then, add up all of your mandatory monthly expenses (e.g., rent or mortgage payment, utility bills, medical bills, etc.).
- Subtract that number from your total monthly income, and that will give you the amount of money you have to spend throughout the month on everything else: food, entertainment, shopping and more.
- Divide the number by four (weeks) to get how much you can spend per week, and divide that number by seven (days) to get how much you can spend per day.
Going through this exercise helps you determine what you can spend so that you don’t go over budget.
Utilize the apps and tools designed to streamline your budget
Now that banking, shopping, and overall financial management has taken a huge leap with apps, there are a variety of tools out there that are intended to make financial planning and money management easier to handle.
With just one password, you can manage your finances, utilities, daily deals, travel and rewards programs, magazine and Netflix subscriptions, and more.
Because apps like Personal Capital and Mint allows you to see everything in one place, you can easily become aware of the balances for all of your accounts so you always know where you stand financially and never go over budget. Both Personal Capital and Mint can be set to send bill pay reminders when your bills are due.
Ensure that getting out of debt is a top priority
It’s essential to incorporate a solid get-out-of-debt plan into your budget. If you have large amounts of credit card, student loan or other debt, make sure that you’re paying at least the minimum monthly payment (and paying it on time). If you can, pay even more — larger payments will ensure that you pay less in interest over the long term.
- Consider using the debt snowball or debt avalanche method for better repayment strategy.
- A credit card consolidation loan may help you get multiple credit card bills under control. We’ve reviewed Payoff which offers one such consolidation loan to help you pay off debt faster. You can even check your rate with Payoff without impacting your credit score.
Revisit your budget at least every six months.
Even the savviest budgeters should revisit their budget at least once every six months in case they need to make any adjustments. For example, perhaps your financial situation has changed and you’re making less money. If that’s the case, you’ll need to determine areas where you can cut back on spending so you don’t go over budget.
If you are making more money, on the other hand, you may be able to increase how much you’re putting toward important expenses, such as your student loans, credit card debt, or savings account.
Avoid acquiring any new debt
Using credit cards properly can help boost your credit score and teach responsible financial management. But using them incorrectly (e.g., not monitoring your spending, not paying off the balance each month, etc.) can damage your credit score and throw off your budget.
When you rack up debt without paying it off, your budget will suffer because you’re spending money you don’t have.
We recommend using a credit monitoring app like Credit Sesame. They give a free credit score and alerts you to any changes found on your credit report. I’ve reviewed Credit Sesame and give them a Smile Recommendation. If you sign up using our Credit Sesame link, you’ll also get free identity theft insurance up to $50,000 along with free credit monitoring and free credit score.