Living on a Budget

Living within your means isn’t always easy. In fact, more than half of Americans live paycheck to paycheck or spend more than they earn, according to a recent study. But there’s hope! 

Establishing a budget can help give you a clear sense of how much money you have coming in and how much you spend. That’s powerful information to help you make smart decisions about how to save, spend, pay off debts, cut down on expenses, and live within your means.

The transition to living on a budget can be tough, however. If you’re used to a hands-off approach to managing your finances, a budget might feel restrictive and even a little overwhelming. Here are some tips for building a budget suited to your life.

Be realistic

Your budget will only work if it actually covers all of your costs. You might be surprised how easy it is to lowball your spending. Consider that 84% of Americans underestimate how much they spend each month on subscription services like cell phone plans, streaming services and cloud storage. What’s more, the majority of those people were off by about $100–$200—an amount that could throw off your monthly budget.

In order to correctly build your budget, carefully drill down into at least one month’s worth of expenses—more if you can bear it—to get a realistic sense of your spending. Account for everything ranging from essentials, such as rent, utilities, groceries and transportation, to non-essentials, such as entertainment and dining out. Don’t forget to add in occasional expenses that might not come up every month, like car maintenance, gifts and travel.

Have an emergency fund

At some point along your budgeting journey, you’re probably going to hit some rough waters. And it turns out that 40% of Americans don’t have enough cash to cover an unexpected $400 expense. That can be a serious problem because surprise expenses are part of life—cars break down, roommates move out and medical bills land in your mailbox. Facing a big cost you didn’t budget for may throw you off course for a long time.

An emergency fund can help you cover unexpected bills without upsetting your monthly cash flow. Plan ahead for those unpleasant surprises by setting aside a little bit every month to build up an emergency fund equal to three to six months worth of expenses.

Treat yourself

If you only focus on pinching pennies, your budget may start to feel like a chokehold. Researchers have found that frequent rewards are a good incentive to keep you on track with your goals, so make long-term budgeting easier by building in some rewards. One strategy to try is “temptation bundling,” a term coined by researcher Katherine Milkman. The idea here is you’re more likely to do something you should do when you pair it with something you do want to do, like going for a run while listening to your favorite podcast. So when you stick to your budget for the month, pair it with a treat like dinner at a nice restaurant. (Don’t forget to build your treat into your budget!)

Stick to it

Once your budget is complete, the hard part is over, right? All you have to do is follow it. But that may be easier said than done.

The best budget is the one you can stick to. To keep yourself on task, try using an app that helps you track your spending and savings goals. That way, you can check your budget before you make spending decisions. By keeping your budget close at hand, it’ll be easier to determine when you should skip going out for a happy hour or resist an impulse purchase. And seeing your success can help you stay motivated to keep going.

Bear in mind, too, that your budget should shift along with your life. If you decide to adopt a dog, for instance, you’ll need to allocate funds for food, vet visits and treats—and you might decide to cut back on evenings out. Before you do get the dog, you should also make sure that you’re willing and able to make those changes to your budget. 

If you’re consistently overspending, go back to the drawing board. Consider if there are any expenses you can cut down—maybe you can cancel a subscription you hardly use or shop around for cheaper car insurance. Also, ask yourself whether your budget is too strict. Increasing your budget for dinners out, for example, might be a more realistic depiction of your actual lifestyle.

Welcome to your new financial home.

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