Money is the leading cause of stress among Americans. Sixty-four percent of us said money was a “somewhat” or “very significant” source of stress in a 2015 survey by the American Psychological Association. The top causes are paying for essentials, unexpected expenses and increasing debt.
Not long ago, I was among that 64 percent, but a money management system changed my life. Today, I want to show you how to minimize your stress by building a budget.
I love budgeting because it helps me get more of what I want. I’m sure a budget can do the same for you.
First, you’ll have to decide what you want so you can organize your spending to meet your goals. My budget system is divided into four levels of priority:
Level 1: Essentials: These are the basic necessities: rent/mortgage, utilities, groceries and gas for your car. If you are spending more than 25 to 35 percent of your take-home pay on your rent or mortgage, you are either overspending on your home or you have an income problem.Level 2: Obligations: These are expenses such as loans, credit card debt, student loans or other financial agreements that carry consequences if they go unpaid. Over time, eliminate as many of these obligations as possible so you have more money for Level 3 and 4 expenses.Level 3: Less-than-monthly expenses: When I was stressed out about money, I used to call these “unexpected” expenses. The truth was, they were expenses I knew were coming but hoped wouldn’t. Many people fall into debt – and become stressed – by not accumulating money for these predictable but irregular expenses, such as car repairs, medical bills, home maintenance and holiday gifts. To prepare, realistically consider those future expenses and set aside money for them each month. For example, if you need to spend $400 on snow tires in November, that gives you eight months to save $50 each month. The more you can accumulate for less-than-monthly expenses, the less stress you’ll have when they come due.Level 4: Nice-to-haves: Now, it’s time to budget money for having fun, such as restaurants, entertainment and miscellaneous spending. Be sure to include spending money too, even if it’s just a little bit. Having some money for which you don’t have to be accountable is the lubrication that makes this system work.Once you’ve established your budget, look for places to cut back so you can tackle that stressful Level 2 debt. Start by paying off the smallest debt first and then move on to the next.
A systematic approach to managing your money can lift the weight of financial stress, help you relax and allow you to get more enjoyment out of life.
Durango resident and personal finance coach Matt Kelly owns Momentum: Personal Finance. Visit his website, www.personalfinancecoaching.com.