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You've probably heard time and again that following a budget is a great way to spend less, save more, and avoid costly debt. And while budgeting isn't a difficult thing to do per se, the more strategic you are in your approach, the more successful you're likely to be. With that in mind, here a few tips for setting up an effective, easy-to-follow budget for 2021.
1. Know what your existing expenses actually look like
You might think you spend $300 a month on groceries, or $200 a month on entertainment. But are you sure? Without accurate figures, your budget won't help you much. So rather than guess at your expenses, verify them. Comb through your bank account and credit card statements to see what various bill categories cost you in the past year, and then use those concrete figures to set up your budget for 2021.
2. Identify your savings goals for the year
Maybe you're hoping to build an emergency fund with three months' worth of expenses in 2021. Or perhaps you want to finally save enough money to buy a home. There are a few ways mapping out your goals will make your budget more effective. First, it will give you a monthly savings amount to work into your calculations (keep in mind that there should be a specific line item in your budget for savings). Secondly, it will help you know how much fat you need to trim to meet your objectives. For example, if your goal is to save $6,000 next year, that's $500 a month in savings. If your current spending only allows you to save $300 a month, you'll need to make some changes.
3. Factor in expenses that don't pop up monthly
We all have bills that recur every month, like our rent, car payments, and cellphones. It's the non-recurring bills that can throw a budget off course, like an annual insurance payment or professional license renewal. To avoid an unpleasant surprise, be sure to account for those one-off costs on a monthly basis. If your IT certification costs $300 once a year to renew, set aside $25 a month for it.
4. Don't allocate every last dollar of your paycheck
In the course of budgeting, you may be inclined to find a place for every dollar you earn. For example, if your monthly take-home pay is $2,500, you might think that it's OK to have your budget total $2,500. But that puts a lot of pressure on you. What if you have a month when you need extra groceries because a friend comes into town at the last minute? What if it's an exceptionally cold winter and your heating bills increase? Rather than lock yourself into a rigid budget that eats up your entire paycheck, give yourself breathing room. For example, if you bring home $2,500 a month, have your various expenses (including your line item for savings) total $2,400, or $2,450.
Will 2021 be the year you conquer budgeting? It just might, especially if you stick to these tips. But one thing you should keep in mind is that your budget is only useful if you actually follow it. So if you find yourself straying, make adjustments rather than give up. With any luck, you'll enjoy a financially successful year that helps you meet the important objectives you set for yourself.