compounding returns is a site for investors, but fundamentally it is a site for all who yearn to build a better life. Building a budget is a fundamental part of building a better life, and doesn't have to be as difficult as you may think!
Here's a ten step, easy way to build your first budget.
1. Start a budget. Over 60 percent of American families do not have a working budget, according to a recent survey by the National Foundation for Credit Counseling. Budgeting has been shown to help people spend less, save more, and incur less debt. With the advent of online budgeting sites like Mint.com making it easier to start and maintain a household budget, there has never been a better time to start living below your means!
2. Cut some big stuff. Sure, the daily lattés can add up, but 2011 might be a great time to make some more significant cuts in spending. Take a look at your monthly budget, focusing especially hard on the big ticket, recurring expenses and get creative. Single? Consider a roommate. Married? Maybe you could get by as a one car family. Making some big cuts could prevent you from having to make a lot of little ones.
3. Sweat the small stuff. Every little bit counts. No one said you have to live like a monk, but setting a monthly maximum for things like coffee, entertainment, and shopping can help prevent blowing your budget.
4. Pay down debt. If you just started a budget, chances are you are carrying a balance on your credit cards. Making debt elimination a priority offers the single best return on investment inside or outside of the financial markets. With average credit card interest rates standing at 16.74%, it is clear that the sooner you pay off your creditors, the more cash you can pocket in the long run.
5. Focus on your 401K. The 401K savings plan is Americans’ primary investment vehicle for a reason. Not only does the 401K offer tax deferred savings, but many employers will match your contributions up to a certain percentage of your salary. If you aren’t contributing up to the employer match, you are turning down free money.
6. Be smart about taxes. Do your best to shelter your savings from Uncle Sam. Your 401K should be your first stop, especially if your employer offers matching funds. You can invest up to $16,500 in 2011 (Add $5,500 to that limit if you are age 50 or older).
Want to invest more? Consider a Roth IRA. If you are single and earning less than $107,000, or married and earning less than $169,000 (filing jointly), you can contribute up to $5,000 after taxes. Withdrawals from a Roth IRA are absolutely tax free in retirement.
Still have money to invest? Congressional legislation has made dividend paying equities an attractive investment, by keeping the capital gains and dividend income tax rates low through 2012.
7. Pay yourself first. Research has shown that the most effective way to increase our personal savings rate is to act like we make less than we do. After paying your bills, pay yourself. Setting aside money for the future should be considered a non negotiable expense. Setting up recurring monthly transfers into a savings account, retirement account, or brokerage account is a great way to automate your savings and pay yourself first.
8. Get a raise. Many businesses and corporations have been hoarding cash and slashing expenses throughout the recession of 2008-2010. As the economy begins to recover, loyal employees will be in an excellent position to request wage increases.
9. Consider a second job. Let’s face facts. Everyday expenses like gas, groceries and consumer products are getting more expensive by the day. For some, our primary job just might not be cutting it anymore. A part time job may bring in just enough money to help save for a special purchase, pay down debt, or invest in the financial markets.
10. Discover your inner entrepreneur. Most of the wealthiest Americans are business owners and entrepreneurs. Most of these ventures started out as a hobby or side hustle. 2011 might be just the time to embrace your entrepreneurial spirit. Consider making some extra cash doing something in your specialty on a part time basis. Who knows, this could blossom into a successful business venture.