Money management isn’t always easy, especially since we constantly feel the pull of instant gratification. But our spending habits and consumerism is actually a bit sadder than this. As economist Tim Jackson succinctly put it, “People are persuaded to spend money we don’t have, on things we don’t need, to create impressions that won’t last, on people we don’t care about.”
This nails how ridiculous our spending behavior really is. If you feel you’re wasting your hard-earned cash in this way, you may be drawn to budgeting as a way to keep your spending impulses in check. It takes a lot of discipline to resist that urge to buy whatever you want whenever you please. However, the rewards are worth the effort involved.
If you can budget effectively, then this will help to edge you closer to achieving your long-term goals. Budgeting allows you to spend your money on things that may rank higher in terms of value to you, such as traveling or studying a master’s degree (which can be pretty expensive).
There are different ways to approach budgeting, but they help ensure that you can minimize your financial stress. We all hate money worries; they can plague us non-stop and make it difficult to fully enjoy life.
The dangers of growing credit card debt
Getting into debt is no joke. Debt can put a serious strain on your relationships, as well as lead to a vicious cycle of money worries and poor mental health, where financial stress makes your mental health worse, which – in turn – makes it more difficult to manage your money. And so the cycle continues, getting worse over time.
As the charity Mind underscores, debt and mental health can interact in all sorts of ways. For example, you may feel forced to do a job you absolutely hate in order to pay off your debt. Debt may mean you struggle to afford the essentials of life, like housing, food, heating or medication. In addition, being in debt, even if you are making enough money to survive, can still make you feel very anxious. For some people, money worries can become so severe that they lead to panic attacks.
There are different reasons people get into credit card debt, including compulsive spending, major life changes (such as job loss), being persistently unwell, not getting paid, and living on a low income. Whatever the reason, it’s important to be aware of how debt can affect your mental health. It can make you feel hopeless (even suicidal), severely anxious, embarrassed, guilty, and convinced that there’s nothing you can do about the situation.
The good news, though, is that there is a lot you can do to ease your money worries. Budgeting allows you to take control of your life when it feels like it’s getting out of control.
Zero-based budgeting is where your income minus your expenses equals zero. It’s really that simple! What isn’t necessarily so simple, though, is actually making sure your expenses match what you’re earning every month. Zero-based budgeting doesn’t mean that you end up with no money in your bank account; it means that if you earn $2,000 a month, then everything you spend, save, give or invest all adds up to $2,000. The point of this form of budgeting is to know exactly where your earnings are going every month.
To create a zero-based budget you firstly need to write down your monthly income. You could use a budgeting app such as EveryDollar in order to do this. Your income should include paychecks, side income, residual income, benefits, and any other cash you’re bringing in.
Next, write down your monthly expenses. This would include rent, food, cable TV, phone bills, utilities, Wi-Fi, and transportation. Your spending will, of course, change from month to month, but this is why you need to create a new spending plan each month.
You’re likely to spend more during Christmas, as well as months in which birthdays, anniversaries, and holidays fall. This is why you need to jot down seasonal expenses. And plan for irregular expenses by setting aside some extra money each month. This way you won’t get surprised and stressed out if your insurance premiums go up.
It will take some practice to make subtracting your income from your expenses equal zero. If you’re spending more than you make, then you need to cut back on expenses. This will often require a hard look at your spending habits and the adoption of some lifestyle changes. Ask yourself: do you really need a car, a TV, expensive coffee, or avocado toast?
Harvard bankruptcy expert Elizabeth Warren coined the 50-30-20 rule for spending and saving. Before putting the 50-30-20 budgeting plan into action, however, you first need to figure out your after-tax income. Once you know what you earn after all your taxes have been taken into account, limit your needs to 50% of the money you’re bringing in each month. Your needs are the basic necessities.
Now you must distinguish between needs and wants. Warren advises people to spend 30% of their budget on their wants, which could include a jacket you’ve always wanted, a trip to Japan, an expensive haircut, dining in fancy restaurants, and nights spent at bars and clubs. It can sometimes be tricky to distinguish between a need and a want (do I really need this jacket for the winter or do I just want it?) Nonetheless, if you seriously think about the question, then the answer will become clear.
The last step is to spend the last 20% of your budget on repaying debts and saving money. The money you save will be necessary for things like emergencies, further studies, a deposit on a house, and retirement.
Successfully implementing a budget may require you to make small changes to some aspects of your lifestyle, and perhaps bigger changes to other aspects. It may seem like you’re sacrificing a lot by cutting back on cable, drinking, or shopping – but in the grand scheme of things, the outcomes in your life will be much more beneficial.