Learning how to make your finances work for you should be a priority for everyone. If you’re reading this you probably care about your finances. At Litchfield Bancorp, we feel so strongly about helping you make your money work for you, that we put together some key points to assist with creating your very own budget. Use your discretion and be honest with yourself about your spending habits as you read.
Show me the money
First things first, you need to nail down your net spendable income (NSI). This is another term for after tax cash flow. This number will give you a starting point for your personal budget. You can read more NSI here. Once you have determined how much cash you have coming in, you’ll need to break down your additional sources of income and your usage.
Don’t Forget to Pay Uncle Sam
Make sure you’re setting aside money for taxes along the way especially if you work independently. If your income fluctuates due to bonuses, incentives, or short-term freelance projects, consider using your last 6 bank statements and finding the average to refer to. Or try taking your prior income taxes to help you determine your current income. Always remember, federal government taxes must be deducted from your earnings to have the closest estimation of earnings.
Don’t Forget the Details
In most households, you may be required to pay a water bill or recycling fee. These expenses need to be factored in when creating your budget. When you are recording all of your expenses, remember to add miscellaneous fees. It’s common for a person to budget their rent but forget to incorporate the smaller monthly bills paid out to maintain their home. For example, incorporate the possibility of expenses for landscaping when you’re creating your budget.
Getting Out of The Red Zone
Once you’ve jotted down all of your expenses, such as your food, clothing, transportation and even healthcare, breakdown your disposable income. If you find that you’re already in the red, meaning your expenses exceed the money you take home, then that is a clear indication that you are overspending. If you break even, then you are probably living paycheck to paycheck and need to reevaluate your spending to cut costs somewhere in order to truly save. Lastly, if you have remaining funds after you deduct all of your expenses, then you can budget that money for a purpose of your choice.
Set Goals and Pay Attention to Details
Setting goals helps you stay focused. Budgets aren’t created solely to limit how much fun you can have. They are created for the purpose of reaching a goal! Whether that goal is a much-needed vacation, a personal investment, or to reach a certain amount of money in your savings account, don’t lose sight of it. Remain disciplined and mindful of where your money is going. Perhaps you are over drafting and incurring late fees on one of your accounts. Small charges like these will eat up your disposable income quickly.
Once you are in the habit of monitoring where every cent of your money goes, you’ll be able to live on a budget and gain the financial freedom you’re after. As you may know the key to living within your means is to understand your spending habits. Creating a plan can make living on a budget easier. With consistency and strong money saving habits, you can comfortably live debt-free. If you need help creating a budget that works for you, reach out to someone from our team.
Vice President, Lakeville Manager