5 Critical Items for Any Budget

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  • Emergency fund

    The ideal: stockpile six months' worth of living expenses (not gross income), to cover a job loss, says Peggy Cabaniss, CFP, president of HC Financial Advisors in Lafayette, Calif., and past national board chair of the National Association of Personal Financial Advisors.

    Cabaniss' advice is to make this one a priority, right along with your retirement contributions, until you amass your target amount. Then you can take it off your budget.

    One way to avoid the temptation not to save: Have the money automatically transferred on the day your paycheck hits. Keep it where you can get to it on short notice, not tied up with a long-term investment. "This money is honestly meant as a cushion for a rainy day," Cabaniss says. If you want to earn a little interest, consider a short-term bond fund, she says.

    The most important thing is to get it out of that checking account. "For most people, what hits that checking account is what gets spent every month," Cabaniss says.

  • Big Purchases

    Want to go on vacation? Buy a car? Make a down payment on a house? Put a new roof on the home you've got? Make it a budget item.

    If you've got a big expense planned, get that money "off the table before it gets into your checking account," Cabaniss says.

    Be willing to rethink your budget and your plans. If you're craving a $5,000 vacation and need another $10,000 for a list of large expenses, "that means you'll have to take more than $1,200 a month from the paycheck for a year," she says. But "you may say there's no way we can cut $1,200 from our monthly spending," she says. "So you go back and do the best you can."

    "It's a back-and-forth process." You may have to scale back your vacation or the list of "special" purchases you're planning on making this year, she says.