Whether your finances are simple or complex, you should develop a budget that pays you first if you want to save and invest money for your future. Here are four tips for budgeting well:
- Evaluate your spending. First, make a master list of all your expenses. List living expenses and necessities first: rent or mortgage, food, heat, telephone, electricity, taxes, childcare, clothing, insurance, medical costs. Then add a line for entertainment, even if it's only a trip to the movies. Finally, the last line should be for investments and savings. If you budget for investments and savings as a regular expense, you'll be more likely to set money aside.
- Earmark a percentage of your income for each expense. Figuring out how much of your income goes toward each expense is a key step in developing a successful budget. Once you have done so, if you classify expenses as either fixed or flexible, it will be easier to make cuts. Remember, it is generally flexible expenses that erode earnings.
- Rank your spending priorities. Label your expenses according to importance, from "essential" to "unimportant." You can then eliminate the unimportant items, which may free up enough funds for a modest investment program. If you still don't have enough to invest, cut some of the moderately important expenditures.
- Pay yourself first. Write a monthly check to a special account rather than leaving the amount in your regular checking account. Your special account could be a savings account, money market fund, or Individual Retirement Account (IRA). Alternatively, many insurance companies and mutual funds have monthly checking account deduction plans that allow you to make a regular contribution to a wide variety of funding choices. However you choose to do it, paying yourself first is the foundation of a disciplined approach to savings.