Most of us don’t need a survey to tell us how worrisome money can be but in case you were wondering, The American Psychological Association released a study in February 2022 revealing finances as the number one stressor for Americans. The good news is that it doesn’t have to be! Even if your income is minimal, you can transform your finances one step at a time with a budget. Doing this can ease your mind and ensure you have all your bases covered. Transforming your finances will even let you spend money on fun things without feeling that dreaded buyer’s remorse!
If you are ready to transform your finances, there are several things you can do. Setting goals, automating savings/bills, uncovering hidden expenses, and setting up a budget will give you the financial freedom you need, even on a minimal income. Let’s look at five simple ways to transform your finances one step at a time.
Step One – Setting Goals
Creating realistic goals for your budget is the first step toward transforming your finances. By setting realistic financial goals, you can reduce stress and anxiety. You can also feel more confident about achieving your financial goals.
When it comes to financial goals, there are two main types – short-term and long-term. A short-term goal is a measurable target to achieve in a year or less. Long-term goals take longer, and they require more effort. In addition, short-term goals tend to be more specific, whereas long-term goals are broader.
Having realistic timelines for your goals will help you make a better financial plan. Make sure to write two separate goal plans. The immediate (or short-term) plan will be used daily, while the future (or long-term) plan will be periodically referred to as a reminder of where you are heading,
*Note – to ensure you don’t get overwhelmed by the task at hand, break the big goal into smaller and more manageable steps. For instance, if your long-term goal is to be debt-free in five years, you can start by finding small ways to reduce your expenses and increase your income.
Step Two – Uncovering Hidden Expenses
Other than writing a budget, the best way to transform your finances is to uncover hidden expenses. These can include cell phone line items, credit card fees, and the infamous recurring charges by streaming services. By uncovering and cutting these costs, you will have more money to put toward your identified goals. We made this a bit easier for you with A Guide to Uncovering Hidden Expenses That are Hurting Your Budget.
Step Three – Automating Bill Pay
Now that you have a better idea of what bills you have and you have cut out the unneeded ones, it’s time to automate your bill payments. Automating your bill payments can be a game changer for your financial life. It can help you avoid late fees and ensure your bills are paid on time. Not only does it free up your mind and reduce stress, but it can also help you make better financial decisions.
There are many different types of automatic payment systems available, from online bill pay to auto-recurring payments to ACH debit services. Most payees have online platforms that give you the option to set up auto-bill pay. For the ones that don’t, there are dozens of apps out there to help you access your bills and auto-pay them from one place. Some of these include Apple Bill Payer, Prism, and BillKeeper. And very often, your bank will have its own bill-pay system you can take advantage of.
To get the most out of an automatic bill payment system, you need to have a budget in place. You should know exactly how much you’re going to spend so that you don’t end up overdrawing.
Step Four – Creating a Budget
Only one in three U.S. families has a budget. This is why we often hear, “I’m living paycheck to paycheck.” The good news is, you don’t have to. Now that you’ve identified your goals, cut out some expenses, and automated bill payments, it’s time for the most important step: creating your budget.
There are many free budgeting apps available. However, using a spreadsheet or the classic pen-and-paper will also work just fine. Writing down your monthly income is the first step in creating your budget. This includes your paycheck and any supplemental income such as side hustles or even gifts. Add your income on separate line items so that you can revise it if something changes.
The next step in creating your budget is to record your monthly expenses. You’ll want to include both fixed and variable expenses. These expenses include things like rent, food, and car payments. Fixed expenses will stay the same each month, while variable costs will fluctuate. For example, rent is a fixed expense. Variable costs are things such as groceries, entertainment, and travel.
Pulling your bank statements and highlighting the different categories is an excellent way to figure out your expenses. For example, if your bank statement shows you that you’re spending $100 on gas each month, consider a separate category for this expense. Similarly, you might be surprised to find that you’re spending way more than you thought on groceries each week. When you break down your spending by categories, you’ll be able to determine whether you’re overspending or underspending.
Once you know how much your expenses are, simply subtract them from your income. This will tell you how much you have left over for savings (and for the fun stuff).
Step Five – Automating Your Savings
Now that you have established your budget, you know how much you can spare for savings. Having money saved is essential for emergency expenses and future planned purchases.
Automating your savings allows you to stay on top of your finances while putting your mind at ease. For example, an automated deposit can be used to build up a college fund, or it can be redirected to an investment account. But it’s also a great way to build up that emergency fund.
Setting up automatic savings through your employer is a great way to build your saving funds. You can request that your human resources department remove a particular percentage of your earnings and direct it to your 401(k). You may also have the option of setting up an automated transfer to your bank’s savings account. This is known as payroll allotment. For every paycheck, a designated portion will go straight into your savings account.
Automating your savings through your financial institution via direct deposit also works well. Several major banks have automatic capture systems that let you set up an automated deposit. Some banks will even allow you to direct your savings to an IRA or Health Savings Account. This is an excellent option if you are self-employed or work for a smaller employer without an established payroll department.
By taking these five easy steps to transform your budget one step at a time, you can have peace of mind—no more worries about missing a bill or how you will afford gasoline next week. Also, now that you have an established budget, you’ve got something to work with! Check out our Top 10 Tips for Stretching a Tight Budget.