5 Key Principles for Effective Budgeting & Financial Stability

It is common to lack the discipline of budgetary management. The average credit card debt in America is over $4,000, pointing to the fact many US consumers do not know how to budget appropriately for their income base. Following these simple five principles can set you on the right track to financial stability.

#1 Pay Yourself First

You cannot be financially stable if you do not save. There is some debate over how much money to save, and how to save it. However, you cannot go wrong with a couple of tips. Contribute the maximum amount your company will match, if there is any matching, to your retirement account each month. Otherwise, you are missing out on potential income. Save 10 percent of your paycheck into an emergency account until you have saved at least three month's salary.

#2 Budget Debt

You must include the debt payments you incur each month in your budget. To determine how much debt you can afford to take on, use a simple formula. Your debts should never be more than half of your monthly income. For example, if you earn $4,000 a month, then the sum of all of your debt payments, including your rent or mortgage, should be under $2,000.

#3 Save Receipts

Banks and credit card companies make mistakes. Your receipts are the only way to show what you spent, deposited or paid off in a given month. Further, tracking your receipts can give you insight into your own spending habits. Keep a receipt wallet with you as you go about your day. Place all receipts, even those small coffee purchases, into the wallet. After a month, you can track your expenses to see areas where you could afford to cut back.

#4 Keep Track of Cash

It is easy to lose track of your expenses when you are spending cash. You rarely get a receipt when you pay for a small item, such as a drink or gasoline, in cash. This can result in hundreds of dollars of unaccounted spending each month. Try keeping track of all the cash you spend in a given month as an experiment. You will learn you tend to splurge when it comes to spending the money in your pocket. If you do not want to continue this process, simply set a cash budget each month. Determine how much cash you will permit yourself to spend, and stop withdrawing once you hit that limit.

#5 Hold Yourself Accountable

Setting a budget is only useful if you stick to it. It is common to justify additional expenses by saying you will keep the budget next month or just need the extra money in a given week. Keeping yourself accountable is the hardest part, so you may want to ask for help. If you are married, set rules with your spouse to determine how much each of you can spend. If one person fails to stick to a budget, think of penalties he or she will have to carry out in order to serve as a deterrent. Set rewards for sticking to the budget well.