In dealing with our daily personal budget we have what we consider fixed expenses and expense that are variable in nature. Fixed expenses would be things characterized by our House Payment or Rent, Car Payment and vehicle Insurance, health insurance, life insurance and utilities. Variable expenses are items like groceries, gas, entertainment etc. Intuitively we know what we can afford to spend because we know how much money we typically are bringing in each month. When everything is going as planned we have some money left over at the end of the month or pay period to do something nice or maybe we decide to save all or a portion.
When the only thing that goes as planned is that the plan keeps changing we have to change our thinking to deal with the challenge presented. If an unexpected expense comes up for any reason, do we reach for a credit card, take money out of savings, reach out to a family member, or take a pay day loan? These situations happen to all of us. If we have to use a credit card what is the backup plan to pay off the incurred expense at the end of the credit card billing period? Are we carrying a credit card balance or paying off the balance in full?
Having a Financial Coach to get advice from comes in handy to help answer these questions and develop a roadmap of ideas that present a range of alternative strategies. We know stuff happens so when times are good we should be saving up for the unexpected expenses. The goal is to have 6 months of living expenses in an emergency fund. It may take years to get that fund established, but along the way to the goal we are slowly changing our mindset about money. How? We slowly see that balance grow while knowing that while it is growing we are paying our bills and have been able to adjust our lifestyle accordingly.
Other saving methods. Let’s say your employer has a 401k plan. The plan may likely have an employer matching contribution. It is highly recommended that you contribute at least the amount of the maximum matching contribution offered by the employer. Let’s say it is a 4% match, you’ll want to contribute 4% yourself. Now you are saving 8% of your gross pay from every paycheck. Over years this really adds up. And, at the same time those funds may be invested into the options offered within the plan. The problem between discussing a 401k and an emergency fund is, can you afford to do both at the same time? Something to note, a 401k contribution is a Pre-Tax deferral. This mean that if you are in the 25% tax bracket $1 of gross pay deferred is affecting your take home pay by $0.75.
Good Advice, if your employer is offering the 401k matching contribution then take advantage of that opportunity first. Making the assumption here that you have enough take home pay to cover your monthly expenses. Then we also start to build the emergency fund up too. We want to change the mindset to saving rather than spending. Controlling how we handle our monthly spending is key to the start of financial freedom. Financial freedom does not always mean early retirement, but is does include feeling more confident about controlling our personal finances.
Handling our money wisely also allows us to improve our credit score. Let’s start with creating a household budget. You can do it yourself by downloading our Budget Questionnaire and filling it out. The budget will immediately indicate a surplus or shortage of funds. Once you have all your expenses listed out you can see areas to attack to lower spending. Work with a finance coach to help with pointing out the problems and start on the road to less financial stress. Get included on our free monthly newsletter by simply entering your name and email address.