Pay yourself first
Balancing earning and spending is one of the basics of personal finance. But there are many ways in which achieving the perfect equilibrium can be a little difficult.
Even someone with good financial habits can get out of balance on occasion. Take – for example – a saver who regularly runs out of money before pay day despite having cultivated the financially-healthy habit of putting money into their savings every pay day (known as “paying yourself first”). They may simply be setting an unrealistic goal of how much they can save.
In this case, they may suffer overdraft fees and interest or face penalties if they move money from long-term savings accounts to cover the end of month shortfall.
Over-savers and over-spenders
These “over-savers” could well benefit from taking similar basic budgeting steps that would also likely benefit “over-spenders” (those who regularly run out of money before pay day because they spend too much)
As mentioned in this eZonomics article How to … make a basic budget, the first step towards managing finances is to look at income and other earnings. Step two is to add up fixed and variable expenses. Then make decisions about whether you’re happy with these costs (ask, do I want to live somewhere cheaper and take more holidays? Or does my family really need two cars?) – and with the earnings.
As we’ve seen, the amount put into saving each month also matters to a budget. Saving enough so you reach your goals in a good amount of time is key – but being too unrealistic can cause cash flow problems.