One of the best ways to get on solid financial footing? Create a budget and stick to it.
We asked Nicholas J. Barbieri, a certified financial planner at UBS Financial Services Inc. in Baltimore, to share five simple ways to improve your budget in 2015.
1. Determine essential expenses: Identify all of your expenses that must be paid each month.These are "fixed expenses," such as mortgage or rent, utilities, cell phone bill, groceries and gas. Add up all of these expenses and then subtract them from your total monthly net income.The amount that remains is your "variable expenses" that you can spend freely or put toward savings.
2. Track your spending: Most people today don't even know how much money they spend in a month. With multiple credit cards and bank accounts today, it is easy to lose track of where your money is going. Mobile budgeting tools can help track spending and alert you when getting close to your spending limits.
3. Create an emergency fund: The car breaks down, health issues arise ... let's face it: We have unplanned expenses every year. By putting aside money now for those unexpected emergencies, you can potentially avoid incurring credit card debt or being forced to take out a loan. If you don't have an emergency fund, start saving now and aim to have three to six months of expenses saved in a penalty-free withdrawal bank account.
4. Utilize the envelope strategy: Instead of having your paycheck directly deposited into your bank account, cash it. Take the cash, set it aside, and write an envelope out for each of your expenses starting with your fixed expenses. You'll be much more conscious of your spending as the envelope nears empty.
5. Start investing early: Individual funding of retirement plans has become a financial necessity. Start with a small amount or, if your employer offers a matching retirement contribution, then contribute the amount required to maximize the amount your employer is willing to contribute. As an example, say you are 25 years old, earning $50,000 per year, and you save 6 percent of your pay before taxes in a retirement account which earns 8 percent per year. When you reach age 65, you will have saved $872,752. But if you were to postpone your savings start date by even 10 years, your account would be worth only $372,590. Additionally, if you do not have retirement benefits through your employer, consider opening an IRA or Roth.