You have learned the basics of how to budget: net worth, money habits, budget tracking, and some helpful tips. With this solid foundation of a budgeteer, you can now build the structure of financial freedom.
Learning how to budget entails more than just writing down your income and expenses. We will talk about these next steps on how to budget that will further prepare you to budget with a purpose:
– Buffer Fund: Surprised To Learn Your First Step Will Be to Save up to $1,000?
– Debt Elimination: Give Yourself a Raise
– Emergency Fund: Find Out How Much Savings You Should Have
This will take every person a different amount of time to complete each structure step. Each step should be completed one after the other to start building something that will last. Don’t be afraid to be all in because your efforts WILL pay off.
A buffer, by definition, moderates the impact of something. Lessen the blow of an unexpected expense by first building your buffer fund.
For example, if you get a parking ticket, you will pay it out of your buffer fund. Your whole budget won’t be thrown out of wack. This is NOT for a new outfit to that concert you want to go to or a gift for a friend’s birthday (there are other ways to budget for that – remember the tips?). Your buffer fund is meant to cover expenses that you could not know are coming.
What would make you feel most protected from unexpected expenses? Choose an amount between $400 and $1,000 – typically 1 to 2 weeks of your pay. Put every extra dollar from your budget towards your buffer fund.
You have learned the basics of how to budget by setting your budget and learning how to track your spending. Hopefully, you have weeded out some non-essential items from your budget and lowered costs to start contributing to your buffer fund and fill it fast. You can find more ways to kickstart your savings here.
Tip: try using debt-free visuals to help you each step of the way, including building your buffer.
Now that you have your buffer built, you are ready to pay off the most avoidable expense – debt and it’s interest. Since your mortgage is a larger lump sum with a steady (yet, still money-eating) interest rate, don’t work on paying off your mortgage in this step. Keep paying the minimum on your mortgage and put all of your extra money towards debt.
Debt-Snowball Method: Some tackle debt with what is known as the debt snowball method via Dave Ramsey. The debt snowball begins with a list of your debts from smallest to largest. Pay off the smaller ones to be able to contribute more to the larger ones each month. As you pay off each debt, the thought is that you gain traction and confidence with each paid-off debt.
Lower-Cost Method: Another way to accomplish paying off your debt is by listing the interest rates for each debt as well. Since the ones with the highest rates are ultimately costing you more in interest, you can choose to pay those off first and put off the debts with lower interest rates sequentially to save you the most money.
These methods of paying off your debt are only suggestions, but they are good tools to help you eliminate this avoidable debt. Don’t pay interest longer than you have to and come up with a plan to eliminate your debt.
You know your money habits and have implemented your budget to be able to stay out of debt. Once you pay off debt that costs you $200 per month, you give yourself a $1,200 per year raise.
With your buffer in place and your debt mended, you can begin to build an emergency fund to protect yourself from large events – mainly, a loss of income. Create an emergency fund for 3 to 6 months of expenses.
You will have a pretty good idea of what your monthly expenses are since you calculated that in the basics of how to budget. Now, strip it down to the bare necessities (rent or mortgage, food, bills, and other minimum payments that are necessary), multiply your total by whatever will make you feel protected (x3 to x6), and make that your next goal. We have a 6-month emergency fund saved that will cover us in case we ever lose income by moving or going through job changes.
You built up your buffer fund to feel comfortable enough to put all of your money towards paying off your debt. With your money freed up, you were able to fully fund your emergency fund. All your bases are covered and your entire income is free to start going towards building wealth for retirement and beyond.
Which budget step are you on?