One of the single best ways to improve our financial situation is to track our money through a monthly budget. When we write out all our income and expenses and really see what we’re working with each month, we get a sense of control that we’ve never had before. Decisions become easier and our path forward becomes clearer.
When we start budgeting, we often identify expenses that we’re familiar with first. There’s an allocation for the mortgage, groceries, car payments, daycare, entertainment and many other typical daily expenses. Those are important costs to concern ourselves with, but oftentimes true wealth-building allotments are left out of the mix.
To gain our financial freedom and win with our money, we need to go beyond the daily expenses and look toward the future. Here are seven often-overlooked budget items that should be considered when building your wealth.
When we’re living without emergency money, we’re flirting with financial danger.
If the car breaks down and there are no savings, guess how it gets fixed? That’s right. We throw it on the credit card. And then we end up paying 15-25% interest because we can’t pay the card balance off the following month. The cycle continues when the washing machine breaks and before we know it, we’re drowning in credit card debt.
Instead, make a budget line item for emergency savings. If you’re starting from $0, kick it off by trying to save $100 per month for the next six months. In what seems like no time at all, you’ll have more in savings than the majority of America.
With a healthy emergency savings account, you’ll be better able to pay for the little unexpected moments that pop up, and keep yourself out of credit card debt.
Sinking Fund Savings
Do you ever notice how when the winter holidays roll around, we tend to overspend? December shows up every year, but we’re just not ready for it or the attached price tag.
Say hello to your new friend, the sinking fund. This little money hack will help you enjoy the holidays instead of cursing them.
Let’s say last winter you ended up spending $1,200 in presents, decorations and general holiday fun outside of your normal spending. To avoid going into $1,200 of credit card debt, save $100 each month starting at the beginning of the year. This way, when December arrives, you have enough to cover the costs of the holidays. This debt-avoidance strategy could leave you full of holiday cheer instead of singing the holiday blues.
The sinking fund isn’t just a budget line item for the holidays. Consider using this savings strategy for other annual or semi-annual expenses like insurance, car maintenance, taxes and even kids’ birthday parties.
It’s fun to get away. And when winter arrives, it’s even more important to say hello to the sunshine and goodbye to the day-to-day grind, if you can.
Vacations feel a lot more relaxing when they’re paid for. By consistently saving each month, your vacation fund may soon skyrocket, giving you enough money to vacation debt-free.
Take advantage of automation to help make the process easy. When you take yourself out of the process, you’re less likely to pass on this crucial vacation savings process.
The best time to start investing for your retirement is today. Compound interest takes your smaller balance today and provides you a huge lump sum in the future. That nest egg can allow you to retire with dignity and likely more able to relax, knowing you’re taken care of.
An excellent place to start with retirement investing is through a workplace 401(k). Often, companies have a matching program as a part of their overall benefits program that provides you with essentially free money based on your contributions.
This is something you should highly consider if you want to build your retirement and your wealth. The initial reduction in your income may seem difficult to handle in the beginning, but as you start to see your retirement account increase, you’ll likely realize the short-term income reduction is worth the increase in long-term financial security.
A traditional or Roth IRA is another smart budget line item to consider as well. Taking advantage of the tax benefits and the diversified retirement account growth could put you in the same playing field as some of the wealthiest individuals in America.
If you’re a parent and you want your kids to attend college in the future, college savings needs to be in your budget. Start small if you must, but start. The earlier you save and invest for the skyrocketing tuition costs in the future, the better off you’ll be.
A smart investing route to consider is a 529 college savings account. When you’re saving into this account monthly, you’re allowing your contributions to grow tax-free. Depending on where you live, you may receive state income tax deductions as well.
Home Down Payment
No matter which type of home mortgage you choose, having a sizeable down payment gives you options. With 20% down, you’ll avoid private mortgage insurance (PMI) and you’ll enjoy lower overall payments.
3%, 10% or 20% down can seem impossible if your savings are non-existent. Craft a budget line item for your future down payment today and start sleeping easier tonight. When your house fund is on auto-pilot, you’ll hopefully amass that sum quickly.
Passive Income Investing
When your money starts to make money on its own, that’s when you’re a passive income investor. This style of income diversification can help you create major wealth.
You don’t need a lot of dough to start down this path. There are now a multitude of investing apps and brokerages that make the process easy. Start with as little as $50 per month in your budget and slowly build up from there. Over time, you’ll become a seasoned investor with multiple income streams.
What other important budget items are often overlooked? Is budgeting an important part of your wealth-building process? Please let us know in the comments below.
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