If you are like most financially responsible people, you have created a budget that lists your income and expenses. However, you may not know what to do with your budget so that you can properly manage your finances and achieve a healthy cash flow. The reality is that many people prepare a budget and do not look at it again for several months. In addition, they often run low on cash because of improper financial management or overspending, and they scratch their heads wondering what they are doing wrong. With a closer look at how to use your budget to achieve healthy cash flow, you can learn the proper way to use your budget as well as to manage your finances.
Your Fixed Expenses
One of the primary components in your budget is your fixed expenses. These are expenses such as your rent or mortgage payment, your car payment, your utilities expenses and more. While some of these expenses may fluctuate slightly from month to month, such as your utilities payment, you have a reasonable idea about what your fixed expenses will be for any given month. A healthy budget generally will allocate no more than 50 percent of monthly income toward fixed expenses. If your fixed expenses are higher than this, there is a good chance that you may be living a lifestyle that you cannot afford. This is a sign that you may need to scale back.
Savings and Investments
Everyone understands that they should be saving and investing for the future. You may have plans to save for your next summer vacation, for a down payment for a new car, for the kids’ college and for retirement. However, you may not know how to properly allocate your funds for savings and investment. As a rule of thumb, you should have at least six months’ worth of expenses in a savings account. If you do not currently have a sufficient balance in your savings account, you should regularly sock away 20 to 25 percent of your income into a savings account. Once your saving account balance is at an ideal level, you can contribute funds into a retirement or investment account.
Debt Reduction
Many people also struggle with high debt balances, and you may have plans to reduce and eliminate debt. This may include personal loans, student loans, credit cards and more. One idea is to seek assistance from debt consolidation services like Freedom Debt Relief or Accredited Debt Relief. You can also consolidate some of your debt to establish the debt on a fixed repayment plan. Ideally, only 15 to 20 percent of your income will be allocated to debt reduction. However, if you have higher minimum payments than this, you must re-adjust your allocations so that you can make at least the minimum debt payments. For example, you may need to live below your means to adjust your fixed expenses downward while you reduce debts. Over time, your payments will be reduced, and you can then achieve a more ideal allocation of funds toward both debt reduction and savings.
Spending Money
The ideal budget should also have ample funds left over for spending money. A reasonable amount to spend on extra items throughout the month is approximately 10 to 15 percent of your income. Out of this portion of your budget, you can pay for clothes, gifts, dining out, entertainment and more. Keep in mind that spending more money one week may mean that you need to spend less money another week. Properly managing your spending money is critical if you want to have enough money available for saving, investments and debt reduction and if you do not want to overspend.
Because your income and expenses can vary slightly from month to month, it is important to create a new budget for each month. Some of the most financially-minded individuals will create a rolling budget that projects income and expenses for the next six to 12 months. This can help you to more successfully plan your finances so that all of your goals are met.
