While working with patients, it may oftentimes become obvious to diagnose various health issues and to subsequently prescribe a solution in terms of medication, rehabilitation exercises, or both. Yet, when it comes to our own finances, the keys to success may not always be so clear – even though they do typically begin with the basics.
The successful management of personal finances usually begins with creating a budget. In doing so, it will not only help you to allocate where your money is going, but also to reduce – or even to completely eliminate – unnecessary expenses so that you can put more funds towards savings for the future. Living on a budget can also help you to get out of debt – or even to avoid going into debt altogether.
The Best Way to Create A Budget
When initially creating a budget, you will first need to separate your expenses between those that are mandatory and those that are discretionary.
Mandatory expenses are those that you are required to pay each month, such as your rent or mortgage, your utilities, your transportation costs such as your auto payment and gas, food costs, and insurance.
In many instances, your mandatory expenses such as your rent and auto payment will also be fixed. In other words, the amount of these expenses will be the same each and every month – although this is not always the case. This means, with a few exceptions, that you may not have much control over when or how much is due on these bills.
Your discretionary expenses are those items that you pay for “non-essential” items such as entertainment, vacation, and the purchase of items that are considered to be wants rather than needs. Because of this, you will have much more control over how much you spend on discretionary expenses – and it is in this category that you can trim costs in your budget if it appears that you are spending more than you earn, or if you want to allocate more towards your savings.
The Biggest Key to Success When Living On a Budget
Although living on a budget can lead to positive financial outcomes in terms of spending less than you earn and helping to keep you out of debt, one of the biggest keys to success lies in paying your most important creditor every month – You!
When setting up your budget, you must remember to not only add your own savings as a “creditor” in your budget, but to make that payment first. In fact, “paying yourself first” is considered to be one of the most important pillars of financial success. In doing so, you can actually build up a great deal of wealth over time.
In addition to putting you in the habit of automatically saving a portion of your paycheck first, paying yourself first will also provide you with a better grasp on how opportunity costs can affect your other financial choices. If paying yourself last was the alternative, it is probable that there may not be enough left to go into savings at the end of each month – resulting in far fewer saved funds overall – and more than likely, a very drastically different retirement lifestyle down the road.
Invest in Your Tomorrow
Want more information about creating a financial plan? Schedule a financial planning consultation with a certified professional.