What’s the first step in creating a spending plan?
What’s the first step in creating a spending plan? Setting priorities is a good place to start. This will involve separating budget items into essential and nonessential (aka discretionary) expenses. In other words, your first budgeting task is to distinguish between things you need and things you want.
What are essential expenses? These are non-negotiable expenses. They’re the first category in your budget because you must pay them. These include things like your mortgage or rent, utilities, food, insurance, basic phone service, student and personal loans, among others.
Needs versus wants. Nonessential—or discretionary—expenses are things that you’d like to have but don’t necessarily need. They include items such as premium cable and cell phone service, restaurant meals, personal care services, and entertainment. When you need to increase the amount of money you have available to pay for essentials, cutting back on discretionary items can free up cash.
Making a difference. The idea isn’t to do away with everything that makes your life enjoyable; no one wants that. This entails looking at where your paycheck goes and finding places to trim costs. Therefore, you will have more money available to pay down debt, add to your savings, or invest for future goals—like buying a new car or a first home and funding your retirement.
Average Yearly Household Spending
|Housing (includes utilities and other household expenses)||$20,670||32.8%|
|Personal insurance and pensions||$7,165||11.4%|
|Health care (includes health insurance)||$5,193||8.2%|
|Food at home||$4,643||7.4%|
|Food away from home||$3,526||5.6%|
|Apparel and services||$1,883||3.0%|
|Total average expenditures||$63,036||100%|
|Source: Consumer Expenditure Survey, U.S. Bureau of Labor Statistics (September 2020)|
Take control with this budgeting tool
Perhaps you already know that your mortgage expense should not exceed 28% of your income, while a healthy budget requires you to save between 10% and 20%. Nonetheless, it is one thing to know what to do and another one to do it. Would your budget pass the test?
A good way to find out is to separate essential and nonessential expenses. Record your income and payments for two months using a budgeting tool.
This tool should be able to break down your income and expenses. These 4 steps will help you take control of your budget:
Step 1: Record the money you receive monthly.
Step 2: See where your money goes monthly.
Step 3: After knowing how much you pay in debts and expenses; you can determine if you have money left for savings at the end of each month.
Step 4: Rank each expense as a need or want.
Be careful if your debts exceed 32% of your income and make immediate adjustments if they exceed 42%. If needed, take a look at how you manage your budget and see what expenses you can eliminate.
Our group of experts are ready to assist you
Every situation is unique, so be sure to consult a professional before taking action. Contact Popular’s Retirement Center at firstname.lastname@example.org. If you have a 401(k) plan with Popular, remember that you can count on our group of experts at TeleBanco Popular® to guide you on matters related to your retirement plan. Call us at 787-724-3657 (press option 2 three times).
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