In the latest Consumer Sentiment Survey by consulting firm McKinsey, 40% of surveyed Americans said they're living from paycheck to paycheck -- and that includes many above the lowest income level. Many of those who are struggling, whether they realize it or not, are the victims of their own spending and saving habits. And whether or not you're feeling financially pinched, you could probably benefit a great deal from a little budgeting.
The budgeting tips below can help you save money and secure a more comfortable financial future.
If you're not living below your means, you need to do so, and a little time spent budgeting can help you make meaningful changes in your financial habits.
If you simply cut back on your spending without going through a structured budgeting processes, you might end up making cuts that hurt while failing to notice easier cuts you could have made. In other words, you might cancel some vacation plans to save several hundred dollars when you could instead have dropped a few premium cable channels and brown-bagged a couple of lunches per week.
The budgeting process
The best way to start off in budgeting is to get a complete picture of your current cash inflows and outflows. The inflows are usually easy. You might have just a salary, or you might have work income plus a little dividend income, alimony income, gift income, or extra income from another activity.
It's difficult but critically important to figure out where all that money goes. To do so, you'll need to track every dollar you spend every day, whether it's in a notebook, a spreadsheet, or a smartphone app. Do this throughout the day as you're spending, and if you can keep it up for at a month, it will give you a pretty reliable picture of your everyday spending. Apps such as Mint, Level Money, Visual Budget, and Goodbudget can make this much easier than it used to be, and it can actually be fun to view and play around with the data collected.
You also need to account for less frequent spending. So dig through a year's worth of credit card statements -- you may be able to access them online if you no longer have the paper statements -- and checks you wrote. This way you'll be able to include monthly, quarterly, and annual expenses such as utility bills, insurance bills, membership dues, subscription expenses, and so on.
Once you know how much you have coming in and how much is going out, you can start to make adjustments. Study each expense and ask yourself how important it is.
For example, if you're spending $175 each month for cable TV, Internet service, and a landline phone, think about how much you really need those services. You might be able to let the landline go and just use a cellphone. You might not miss cable TV's offerings if you find enough to watch through the many streaming services available and their growing content libraries. When tracking your expenses, you might even come across some items that are completely wasteful, such as a $35-per-month gym membership you never use. If you can let that go, you'll save $420 per year.
Give each item some careful thought. Car insurance may not be optional, but a little shopping around might save you a lot of money. You will, of course, want to keep your brokerage accounts or other financial accounts, but you might want to move to a different bank or brokerage to save money on fees and commissions.
More budgeting tips
Here are some more important things to remember.
Don't forget to include your saving and investing goals in your budget. Plan to make available and sock away as much as you need in order to build the nest egg that will fund your retirement. If you'll need money for a house or college expenses, plan to save for them, too.
You can automate many parts of your financial life. For example, you may be able to have a certain amount transferred each month from your paycheck to a savings or investment account. Many of us have paychecks direct-deposited to our bank accounts. If you're doing that, you may be able to have a set sum transferred from that initial bank account to a separate savings account -- and possibly to a brokerage account, if there aren't prohibitive fees. Automating retirement savings can be a great idea if it prevents you from spending too freely and not leaving enough money for critical retirement investments.
You can also set up lots of bills to be paid automatically from your bank account. This can make you less likely to fall behind on bills. If you're automatically saving for retirement and paying major bills, then you're taking care of the most important things and will have an easier time seeing how much money is left for discretionary purchases. Be sure to keep up with how much you're spending, though. Automatically paying credit card bills in particular might lead you to spend more if you never see your total charges. Automation can be handy, but don't let it blind you.
Budgeting doesn't have to be painful, and when you start to notice your savings swelling, you won't doubt for a second that it was worth it.