Creating a budget and savings plan as a beginner is an important step towards financial stability and achieving your financial goals. Below is a simple, step-by-step plan for beginners:
- Assess Your Current Financial Situation
Before you start budgeting and saving, you need to know where you stand financially.
- Income: List all sources of income (e.g., salary, freelance work, side hustles, etc.).
- Expenses: Track your monthly expenses for at least a month (housing, utilities, groceries, transportation, etc.).
- Debts: If you have any debts (student loans, credit cards, etc.), list the balances and interest rates.
- Create a Simple Budget
A budget helps you allocate your income to cover necessary expenses, savings, and debt repayments.
The 50/30/20 Rule
This is a simple budgeting method:
- 50% for Needs: Essentials like rent, utilities, groceries, and transportation.
- 30% for Wants: Non-essential expenses like entertainment, dining out, and subscriptions.
- 20% for Savings & Debt Repayment: Savings, emergency fund, and debt repayment.
Steps to Build a Budget:
- Income:
- Total income for the month (after tax).
- List Monthly Expenses:
- Needs (50%): Rent, utilities, groceries, insurance, loan payments, etc.
- Wants (30%): Dining out, entertainment, subscriptions, shopping, etc.
- Savings & Debt (20%): Emergency fund, retirement contributions, extra debt payments, etc.
- Adjust and Cut Back: If your spending exceeds your income, identify areas in your “Wants” category where you can cut back.
Example:
- Income: $2,500 per month
- Needs (50%): $1,250
- Rent: $800
- Utilities: $150
- Groceries: $200
- Transportation: $100
- Wants (30%): $750
- Entertainment: $100
- Dining out: $200
- Subscriptions (Netflix, gym, etc.): $100
- Shopping: $350
- Savings & Debt (20%): $500
- Emergency Fund: $200
- Debt Repayment: $300
- Build Your Emergency Fund
The emergency fund is a safety net to cover unexpected expenses (e.g., medical bills, car repairs) without going into debt.
How to Build an Emergency Fund:
- Start Small: Aim for 3–6 months’ worth of living expenses.
- Set a Goal: If your monthly expenses are $2,000, your emergency fund goal is $6,000–$12,000.
- Save Regularly: Set aside a portion of your 20% savings for this fund until it’s fully established.
Example:
- If you save $200 per month for the emergency fund, it will take you about 30 months to build a $6,000 emergency fund.
- Start Saving for Retirement
It’s never too early to start saving for retirement. The earlier you start, the more you can take advantage of compound interest.
How to Save for Retirement:
- Start with Employer Contributions (if applicable): If your employer offers a 401(k) or pension plan with matching contributions, contribute at least up to the match.
- Open an IRA: If you don’t have access to a 401(k), consider opening an Individual Retirement Account (IRA), offered by Pillar Bank, to save for retirement.
- Aim to Save 15% of Your Income: If possible, try to allocate 15% of your income to retirement savings. Start with a smaller percentage if you’re just beginning, then increase it gradually.
Example:
- If you earn $2,500 per month, saving 15% would mean contributing $375 to your retirement fund every month.
- Pay Off Debt
High-interest debt (like credit card debt) can quickly accumulate and hinder your financial growth. Focus on paying off debt, starting with the highest-interest debt.
Debt Repayment Strategy:
- The Debt Snowball Method: Pay off the smallest debt first, then move on to the next smallest once the first one is cleared. This method can build motivation.
- The Debt Avalanche Method: Focus on paying off the highest-interest debt first, which minimizes the amount of interest you pay over time.
Example:
- If you owe $1,000 on a credit card at 18% APR, you should aim to pay off that balance as quickly as possible, while still making the minimum payments on other debts.
- Track Your Progress
Regularly monitor your budget to ensure you’re sticking to it. Use budgeting apps or spreadsheets to track expenses, savings, and debt repayments.
- Review and Adjust Regularly
Life changes, and your budget should reflect that. Review your budget every few months or whenever there’s a major change in your income or expenses. Adjust your spending and savings goals accordingly.
Example Monthly Breakdown for Beginners:
- Income: $2,500
- Needs (50%): $1,250
- Rent: $800
- Groceries: $200
- Utilities: $150
- Transportation: $100
- Wants (30%): $750
- Entertainment: $100
- Dining out: $200
- Subscriptions: $100
- Shopping: $350
- Savings & Debt (20%): $500
- Emergency Fund: $200
- Retirement Savings: $150
- Debt Repayment: $150
By following these basic steps, you’ll create a simple yet effective financial plan. Starting small and gradually increasing your savings and debt payments will help you build a solid financial foundation.
Meet with a Pillar Bank representative who can help with savings, loans, and more.