Financial experts often say the first step to financial freedom is creating a budget. But when you are a low-income earner it can be nerve-racking to prioritize because of competing interests and the current tough times.
Looking at your expenses, for instance, you may feel pulled in a million directions. You have to save for retirement, save for college, repair your car, buy new clothes, and even repay debts.
If you're feeling this way, here are four tips to help you prioritize your budget.
Don't Postpone Retirement Savings
Saving for retirement is the most important financial goal you can ever make. Unfortunately, the majority of Americans don't prioritize it. In a 2019 study by the Federal Reserve, over 25% of working adults had no form of retirement savings. Most of them make this mistake because retirement seems far away. Some also think that they will continue working in their 70s and 80s.
Many seniors warn that some retirements are involuntary. For example, health issues, age discrimination, and even layoffs have forced many into early retirement. So if you don't save for retirement now, you're taking chances with your future.
Prepare For Emergency Or Unexpected Expenses in Your Budget
Starting an emergency fund will help you avoid taking on debts and help you cover unexpected costs when you lose your job or need to pay major medical bills.
Look at the current crisis for instance. People who saved for unexpected situations like this are having a better time than those who didn't. They can sustain themselves with emergency savings even if their income reduces due to the massive job losses.
Although there is no definite amount of how much to save, many experts say start by saving at enough to last you three months. But if your earnings are inconsistent, it pays to save more.
Set Aside Funds For The Expected
Some expenses are inevitable. It's not a matter of if but when you must dig into your pockets.
For example, if you own a car, you know repairs and maintenance will be needed. If you own a house, you know you will call a plumber, get your roof repaired, or repair your dishwasher.
Contrary to what some people think, these are not unexpected expenses. They're predictable expenses that usually happen at random intervals.
To prepare for these expenses, it is wise to have funds set aside for them. Separate these funds from your emergency savings.
Similarly, if you know you'll have to buy a home or a car someday, start saving now. This will prevent you from depending entirely on financing your next car. It will also help you get favorable financial terms when buying your next home.
Focus On Other Financial Goals in Your Budget
Once you have set aside money for retirement, built up emergency funds, and prepared for expected expenses, it's time to focus on other financial goals.
These are costs that can be prioritized based on their costs and needs. And to help you make informed choices, here are a few steps to follow:
Create a List
Think about every remaining goal that you will have to save for. Perhaps you want to go on holiday or upgrade your kitchen. While brainstorming these goals, ask yourself how you will raise funds for these expenses. And add it to your list.
Tally The Cost
After listing, calculate how much money you will need for each goal and write a target date. While at it, strive to be as accurate as possible. This will help you budget for them.
Determine How Much To Save
Divide each cost by the number of months to your deadline. This will give you how much you must save every month to achieve your goal.
Edit Your Goals
As you look at the figures, you will probably notice that you may not have enough money to meet all your goals when you factor in retirement savings and other necessary costs. This will help you cut a few goals and change deadlines for some.
Edit Your Goals
Prioritizing your budget isn't easy, especially when you're a low-income earner. But with good planning and determination, you can work your way up to financial freedom. We hope these tips help you achieve that dream.