Times are changing and prices are rising at a rapid rate that many cannot keep up with. A study of tradingeconomics.com shows that the annual inflation rate reached 8.6% in May. This is the highest since December 1981. “The monthly expenses of an average household are $5,111 ($61,334 per year),” said Lyle Daly on Fool.com. “The average annual after-tax income is $74,949.” As you can imagine, this leaves very little room in the budget for big expenses.
How can you start budgeting early for big expenses? At some point, we’ve all wanted to make a big purchase and didn’t quite have the money to do it.
Fortunately, there are a few simple steps to get you started. The first step is to save your extra money. When it comes time to add a big expense, be sure to be intentional with what you spend your money on. Finally, have a clear plan of how you will pay for your major new expenses.
There is a common rule created by Senator Elizabeth Warren of Massachusetts called the “50/20/30 budget rule.” The trickiest part is incorporating it into your routine. As Investopedia.com explains: “The basic rule is to divide income after tax and allocate it to spend: 50% for needs, 30% for wants and 20% for savings.” You will need to divide the money you spend on your needs/wants and the amount you set aside for savings. You might be surprised how much you spend in certain areas. This is a good time to cut unnecessary expenses.
Be intentional with what you buy
There are several questions you should ask yourself before making a big purchase for the wants category: Will this expense end up being an asset to you? How long will it last? Will you end up having to replace it in a few months? Are there cheaper options that are just as good? Will this expense bring you joy?
What about expenses you can’t control, like an emergency room visit or a broken pipe in your house? This is where your savings should come into play. Medical or other emergency expenses often arise when you least expect them. Without accumulated savings, paying for these types of expenses will likely result in additional debt. That’s why it’s best to start preparing early even if you don’t expect to have a big expense in the near future.
Make a clear plan
Having a clear plan for how you will be able to make payments and how much to pay if you don’t pay expenses up front can be crucial. If you can help it, this step should come before you make the purchase. Planning ahead will help you budget this expense into your monthly expenses.
It will also help you visualize if you have the necessary funds to make the purchase prudently. According Investopedia“A budget helps you determine your long-term goals and achieve them. If you’re just drifting aimlessly through life, throwing your money at every pretty shiny thing that catches your eye, how are you going to save enough money to buy a car or put down a down payment on a house? »
Budgeting for a new expense can be overwhelming, but taking a few extra steps can become an easier task. When spending money, be sure to put some aside to save, ask yourself a few questions before making your next big purchase, and always have a clear plan of how an expense will fit into your budget. .
Lindsey Certonio is a project manager at Stage Marketing, a full-service content marketing agency based in Provo.