Budgeting Your Finances: Knowing What You Can Afford
Money makes the world go around, as they say, and it sure can feel like money revolves around everything. And while budgeting and taking control of your finances is always very important, so is making your money work for you. Your budget should be something that you can work with as opposed to compete against. With that being the case, knowing what you can afford is very important.
How, though, can you get a better hand on budgeting, affordability, and generally working towards a future of financial freedom?
What do you want versus what do you need?
Many of us have the common mistake in our budgeting in that we look at what we want as opposed to what we need. It sure is easy to convince yourself that ‘wanting’ something is equal to needing is. But just remember that having a full belly and a clean place to live surely trumps enjoying a sugar high or buying a new entertainment product or an Amazon purchase.
Define wants versus needs before making any purchase.
Set a clearly defined reason for every purchase
Before you do anything else, make sure you have a clear reason for making every financial decision that you undertake. Budgeting your finances means having a clear and specific reason for everything you buy. You might think this sounds tedious, but you need to factor in how the purchase goes into your long-term plan.
For example, if you are trying to pay off debts, do you really need a dessert midweek? Or is it just a desire?
Setting a percentage aside
I also try and recommend that you look to break your finances into the following goals:
- As much as you need to pay off your needs; housing, food, utilities, insurance etc.
- Around 20% of your earnings should be taken away to go into savings and for emergencies.
- Around 20% should go into the ‘wants’ section – the items you need for personal satisfaction.
That leaves you around 60% to spend on essential needs; if you cannot do that, cut the ‘wants’ section until you can.
Focus on your debts
Another big mistake that many of us make is that we don’t focus strongly enough on debts. Personally, I would make paying back debts (at a rate you can afford) the priority. You might need to miss out on a night out with friends this month to cover the debt payments, but always prioritise debts over anything for personal enjoyment.
For example, I recommend trying to use what is known as a ‘debt snowball’ system. This means that you pay the absolute minimum that you can on everything but your smallest debt. Then, you pay the maximum that you can afford on that debt until it is paid off. Once that is paid off, those funds are diverted to the next debt and so on.