You did it! You made a budget! Pat on the back for you. You have learned a ton of new information already, and now we're going to teach you how to apply it in real life. Yeah, we know we taught you what a budget is, big and important sounding financial terms, and how to make a budget. But here is the real test: can you stick to your budget IRL? It can be hard, especially at first. All it takes is some practice, learning from mistakes, and some life hacks to stretch that money.
Usually we talk about savings last, but we want to talk about it first this lesson. You may not be convinced you need a savings account or really get why it is important. We're going to run down through a few scenarios where having some savings comes in handy to keep your motivation up. Then, we're going to divulge some top secret tips for staying within your budget so you're not spending more money than you have (spoiler alert: this is a huge no-no!)
So savings. We know, we know. We've talked about it like a hundred times. Pop Quiz: Do you put money into savings or expenses first. SAVINGS, PEOPLE!! Every time. Here's why:
Let's say you really, REALLY want to go to this super awesome summer camp. It's an entire week of your favorite things (sports, video games, food, origami, you name it). But the catch is that it costs $600. And your parents say you have to pay HALF.
Dude. That means you have to fork up $300 to go to this camp. Remember, you're only making $200 a month with the dog walking business. And the camp is in 2 months. But you still have to pay for your regular expenses. Let's review:
Income - Savings - Fixed Expenses = Amount available for Flexible Expenses
$200 - $20 - $65 = $115
So if the camp is in two months, and you save EVERY PENNY of your flexible expenses, you still only have $230 towards your camp ($115 x 2 months). You are $70 short of your portion of the camp payment.
BUT WAIT! You've been putting $20 into your savings account every month! You've been sticking to your budget for about 6 months, plus or minus a few bucks here and there when you've had a surplus or needed a few more dollars at the end of the month.
$20 x 6 months = $120 in savings. You'll totally have enough! You will even have a $50 cushion in your savings account for the future. Man, you are a financial wizard. You're totally going to camp. See, savings are your secret little stash of cash that helps you pay for big time purchases. The reason you don't want to dig into your savings for everyday purchases is because then you won't have money for the stuff you really want or need. Savings help those big purchases happen sooner and with less financial strain.
Developing the self-discipline to keep your spending within the available limits is the single biggest skill that will lead to financial success. REMEMBER THIS: living within your means, staying within your budget, whatever you want to call it, will get you where you want to be financially. Just don't spend money you don't have. If you only have $115 toward flexible expenses every month, don't go spending $150 on a shopping trip every other week. The math will not work, you'll be screwed, and out of money when you really need it.
Savings help when your income fluctuates and you need more than you think. Say your dog walking business gets really slow with summer vacation, and you only make $110. That means you are $90 short ($200 - $110 = $90) of your normal income. What do you do? Easy peasy. You, my friend, have prepared for this. Your fixed expenses of $65 are covered. You still have $25 left for flexible spending. In these situations, you gotta reign it in and spend less when possible. When not possible, your reserve will help you cover the necessary expenses during those cheaper months until your income is on the up and up again.
See how amazing it is to be able to pay for the things you need and want? And you made that happen by preparing for the future! Give your past self a hug. Go ahead, we'll wait.