My dad was an accountant. He began teaching me about money since I was about 7 or 8 years old. It’s probably not surprising that I ended up being an accountant, too. For more than 10 years, I’ve been learning about money. Not just through education, but also by managing money for many multi-million and billion-dollar companies. It’s safe to say that I’ve learned a lot about budgeting and managing money over the years.
I try to apply everything I learn to my own budget and finances. However, not everyone is taught how to budget or manage their money. That’s one of the reasons why I started my blog – to educate and empower other women to take control of their money, too. Budgeting and managing money doesn’t come easily or naturally to anyone. But here are the top 6 tips I’ve learned about budgeting during my career as a professional accountant.
1. Never spend more money than you earn
This might sound like an easy tip, but it’s surprisingly often ignored. The problem most of my students have with their budgets is a simple one: they’re constantly spending more than they earn. When you’re spending more than you earn, you’re either using debt or dipping into any savings you might have. Both are equally dangerous because once you spend all your savings, you’ll start turning to debt either way. That means more debt and interest payments in the future.
In order to start gaining some control over your finances, you need to spend less than you earn. For some, this is relatively easy. It might mean cutting back on discretionary spending or making lifestyle changes to save more money. However, for others, it’s a lot more difficult. If you’re not earning enough money to cover all your essential living expenses without using debt, then your only option is to increase your income.
It’s the idea of living within your means. Spending less than you earn will not only keep you debt-free, but it will also give you room in your budget to dedicate money towards your goals. It gives you extra money to pay down debt, save up for a house deposit or save for travelling.
2. Keep a large fully-funded emergency fund
The days of saving $1,000 for emergencies are long gone. Many people think their emergency funds are only for covering emergency expenses like urgent car or home repairs. However, your emergency fund needs to be much more than that.
Your emergency fund also needs to be able to replace your income for a certain period of time if you’re ever out of work. Life happens and it’s often out of our control. You could get injured and be out of work for weeks. Or you could lose your job during a recession and be out of work for a few months. When you’re not working, you’re not earning.
Your emergency fund is your safety net during those times. It should be enough to cover all your essential living expenses for as long as it will take to get a new job. Without it, you’ll have no choice but to use a credit card to survive. As a result, you’ll push yourself into debt and have to deal with higher debt and interest payments for the foreseeable future.
How much should you save for your emergency fund? I tell my students that it depends. It depends on how much your essential living expenses cost and how long it’ll take you to find work given your skills and experience. The lower your essential living expenses are, the less you’ll need if you lose your job.
Furthermore, don’t be afraid to use your emergency fund if you’re in a real emergency and you need it. That’s why it’s there! Just remember that you need to replenish what you use as soon as possible. You need to keep your safety net as strong as possible at all times.
3. Only use cash until you can avoid overdraft
I don’t carry or spend any cash. It’s actually not something that I recommend as a long term solution. However, if you’re having trouble controlling your spending or finding yourself going into overdraft, then it’s the best solution.
By using only cash, you’re limiting the amount you can spend. You spend until the cash runs out, and then make do until you earn more money. Many studies have shown that people actually spend less when they physically have to hand over money. You become more conscious of how much you’re spending when you see your wallet slowly getting emptier.
This is a great way to learn how to control your spending while removing the risk of going into overdraft.
4. Credit cards should only be used if you can pay it off in full every month
I use my credit card for almost everything. But I’ve never had a single cent of credit card debt for one main reason. I pay off the entire balance of my credit card in full every single month. That way, I’m not going into debt and I don’t have to pay any interest. Credit cards can be confusing for many, so I try to teach my students a bit about how they work.
When you use a credit card, you’re borrowing money. And borrowing money isn’t free. It comes at a cost which is the interest you pay. It’s important to know that no one is lending you money for nothing. Banks and credit card institutions are lending you money in order to make money off you. The interest you pay on your credit card debt is income for the card issuer.
Therefore, they don’t really want you to pay off your debt, because then they can’t profit off you. Making only the minimum payments is also not enough. It’s not designed to pay off your debt, it’s designed to keep you in debt for as long as possible so that you continue to pay interest. As a result, if you can’t pay off your credit card balance in full every single month, you just shouldn’t be using one.
5. Your budget should align with your goals
Too many people think budgets are too restrictive. I personally love my budget, and it’s not just because I’m a dorky accountant. I love my budget because instead of being something that restricts me, it’s something that shows me what I can do.
When you have money left over in your budget you have the freedom to dedicate those dollars to your goals. It might be financial goals like paying down debt or saving up your emergency fund. But it could also be goals for the life you want to live, like saving up for travelling or buying a new wardrobe or taking that dance class you’ve always wanted to try.
Your budget is a representation of what’s possible with your money. When you’re tracking your spending you’ll start to see where your money is actually going. When you know where your money is going, you no longer stare at a tiny bank balance wondering where it all went. You can start to make intentional decisions about what you want to do with your money instead.
6. The right budgeting method can make or break your finances
Not all budgeting methods are the same and they’re not all a perfect fit for your life. Using the wrong budgeting method is like wearing a pair of shoes that don’t fit properly. They’re hurting you more than helping you and can lead to bigger problems down the line.
All budgeting methods have their pros and cons. But it’s important to find the one that suits your life and your goals in order to make the most of budgeting. How do you know which method is right for you? Unfortunately, there’s no right or wrong answer. It’s just like buying a pair of shoes – you need to try them on before you find the perfect fit. You’ll have to experiment a little to see which methods work for you and which ones don’t.
I’ve learned a lot about budgeting and managing my own personal finances through my career as a professional accountant. These are the lessons I teach my students on my blog and continue to apply to my own finances.