How Budgeting Can Help You Achieve Your Financial Goals

Written by:

Baylor Cox

Reviewed by:

• Erin Frizell

Establish a Budget and Stick With It

During your 20’s and 30’s, you’re likely busy establishing yourself in your job or career, building new relationships, enjoying activities with friends and family, and generally figuring out how to navigate through new challenges and opportunities. There never seems to be enough time to focus on your financial life.

However, a budget can help you achieve true financial wellness. The following 5-step process can help you create a budget that helps you work toward your financial goals.

1. Define your goals

Financial goals should be both short-term and long-term.

Here are some examples of short-term goals:
• Save for a vacation
• Purchase the latest Apple Watch
• Upgrade your furniture
• Save for a wedding
• Start an emergency fund

Here are some examples of long-term goals:
• Buy a home (if you’re renting)
• Pay off student loan debt
• Buy a franchise or start a business
• Build an emergency fund to cover three to six months of living expenses
• Retire early (or just start saving for retirement)

Make Your Goals Measurable

Write down your financial goals and make sure they’re measurable by including actual dollar amounts and time frames. Here are some examples of measurable financial goals:

• Build up a $1,000 emergency fund in 10 months.
• Pay off a $3,000 credit card balance in 18 months.
• Contribute 8% to your company retirement plan.
• Increase retirement contributions every January 1st by 1%.

If your goal is to build up a $1,000 emergency fund in 10 months, your monthly goal is $1,000 divided by 10, which equals a $100 monthly contribution to the fund.

2. Know Your Income

Before you can establish a budget, you need to know exactly how much money you have coming in each month from your employer and any other sources.

Be sure to include only the money you actually receive — that is, your net pay (the exact amount after taxes and other deductions), not your gross pay.

3. Total Your Monthly Expenses

You can’t create a budget until you know exactly how much money you’re spending each month. When figuring out your monthly expenses, be sure to include the following:

• Groceries
• Student loan payment
• Credit card payment
• Cable/Wi-Fi/streaming apps
• Rent
• Car loan payment
• Cell phone plan
• Entertainment/eating out

Also, don’t forget to include expenses like doctor and dentist visits, insurance payments, haircuts, gifts, manicures/pedicures, and others. Looking at past bank and credit card statements can help you get a realistic picture of your spending habits.

4. Create a Realistic Budget

To take your first stab at a budget, add your monthly expenses from step 3 to the monthly goals you calculated in step 1. Then, subtract that total from your monthly income calculated in step 2. If the balance is positive, you’ve created a budget that works for your current lifestyle. Here’s an example:

• Monthly income: $3,500
• Monthly expenses:
  • Rent: $1,200
  • Groceries: $300
  • Student loan payment: $150
  • Credit card payment: $100
  • Entertainment: $100
  • Cell phone plan: $50
  • Other: $150
  • Total expenses: $2,150
• Monthly savings goal: $500
• Total goals: $500

Now subtract the total expenses and goals from your monthly income:

$3,500 (income) – $2,150 (expenses) – $500 (savings goal) = $850

In this case, you have $850 left over, so you’ve created a budget that works for your current lifestyle. If the balance is negative, you have some more work to do.

That leads us to Step 5.

5. Revisit Your Goals and Expenses

If the first swipe at your budget came out negative, rework the numbers and try again. For example, you can review your expenses to see which ones are essential and which you can cut.

Consider dropping subscriptions you no longer use. Also think about changing the amount of time needed to meet your financial goals. You might decide to adjust your savings target, stretch the time frame for paying off debt, or reduce some unnecessary spending.

Another option is to figure out a way to increase your income. That might mean taking on a side job, selling things you don’t use, or finding ways to ask for a raise or better benefits at work.

Thinking about your goals can give perspective on how to approach financial planning. Once you have the bigger picture sketched out, you can fine-tune the details of your action plan to work toward your goals. This approach ensures you’re not only covering current needs but also setting yourself up for future success.

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Tactical Tip

Set aside enough money in an emergency fund to cover an unexpected expense. For example, your budget might be doing fine for several months before you suddenly need a $750 car repair. Getting back on track after an emergency may be difficult.

Keep in mind that emergency savings are just that — money to use for an emergency. Try to avoid using a credit card for real emergencies, since carrying a balance means paying interest. Instead, use the emergency funds and then rebuild those funds again — that’s what they’re for!

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Manage Credit Cards Wisely

Credit cards are convenient, but they can also be the most expensive kind of debt. If you use them too much, they can become the biggest obstacle to reaching your financial goals. When using credit cards, consider these valuable tips:

5 Good Habits to Develop

• Pay in full every month: Avoid paying interest by paying off your credit card balance in full each month. If you only make the minimum payment, interest charges can add up quickly.
• Avoid high-interest rates: Be mindful of cards with high-interest rates. If possible, transfer balances to cards with lower rates or consider a 0% APR balance transfer offer.
• Use credit cards for planned purchases: Only charge purchases you’ve already budgeted for. This will help you avoid impulse buys that can quickly snowball into credit card debt.
• Monitor your spending: Track your credit card spending regularly to stay within your budget. Many credit card companies offer apps or tools that can help you keep tabs on your spending habits.
• Use rewards wisely: If your card offers rewards or cash back, make sure you’re using it strategically and not overspending just to earn points.
• Set a credit card payment due date reminder: Set up alerts or reminders to ensure you never miss a payment and avoid late fees.

6 Bad Habits to Avoid

• Using a card to make ends meet: Relying on credit cards to cover basic expenses because you don’t have enough income can lead to long-term debt.
• Using several cards at a time: Juggling multiple credit cards can make it harder to keep track of your balances, due dates, and interest rates. Consider simplifying by using one card or consolidating balances where possible.
• Not researching other options before applying: Before applying for a credit card, research your options to find one that suits your financial needs.
• Exceeding 25% of your credit line: Using more than 25% of your available credit can negatively affect your credit score.
• Using rewards programs as an excuse to buy more stuff: Don’t fall into the trap of overspending just to earn rewards points or cash back.
• Making large purchases unless you can pay off the balance quickly: It’s tempting to make big-ticket purchases, but if you can’t pay off the balance in a short period, the interest will quickly pile up. Stick to what you can afford to pay off immediately

Paying off Credit Card Debt

Many people carry balances on their credit card — many on more than one card. When that happens, it can feel almost impossible to pay it off. Where do you start? There are a couple of strategies to consider.

Snowball Method

It’s called the snowball method because your payoffs start small but get bigger over time. Pay off your smallest balance first. When it gets paid off, the next smallest debt becomes your focus, until you are credit card debt free. For many people, the satisfaction of seeing that first debt get paid off quickly makes the snowball method the best choice.

Avalanche Method

This is called the avalanche method because you are paying off the most expensive debt first — the debt with the highest interest rate. To use this payoff method, list all your debts in order of interest rate, from highest to lowest. The card with the highest rate on your list is the one to focus on first. When it gets paid off, move on to the debt with the second highest rate until you have zero credit card debt.

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