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When you’re building a financial plan, one your first steps should be to build a basic household budget. This simple spending plan helps you determine where your money should go each month. It doesn’t take long to create, but it’s the foundation for everything else you’re going to need in order to reach your financial goals.
After you’ve subtracted your necessary expenses, you should set a target savings goal out of what’s left. This is money you’re going to put aside for long-term financial goals like building your emergency fund, saving up for your college expenses, and saving for retirement.
Debt plays a bit of a mixed role in a budget allocation. If your accounts require minimum payments, you should consider these as part of your necessary expenses. Missing minimum payments damages your credit score and could lead to expensive penalties so you really need to make these payments on-time. From there, a good strategy is to consider paying down your debt as one of the financial goals to be paid out of your monthly savings.
The final category in your budget should be variable spending. This is spending you have control over and can adjust if necessary. This includes necessities that you can delay such as buying new clothes or paying for home renovations. It also includes entertainment spending such as going out to dinner or taking a vacation. Be sure to include some spending for fun activities each month. By setting aside a certain amount for entertainment, you’re probably less likely to cheat on your budget.
Here’s another tip for this category – break down your spending as much as possible. In other words, if you break down broad categories into subcategories, you’re more likely to find ways to trim that budget when necessary. For example, you might take a category like clothing and divide it into kids’ clothes, parents’ clothes and drycleaning. Similarly, a broad category like personal care might break down into hair care, nail care, beauty supplies, gym membership or healthy and beauty.
The chart below illustrates consumer spending in 2010, according to a study from the Bureau of Labor Statistics.
This article is for information and educational purposes only; does not necessarily represent the opinion of Protective Life Insurance Company; and, is not intended to serve as financial planning advice but, instead, to supplement other information specific to your situation. For information about Protective Life and its products and services, visit www.protective.com.