A budget is essential because having a budget is the first step to achieving financial success. “It’s the backbone of everything else that you do financially,” says David Weliver, founder of financial blog MoneyUnder30. “It all comes down to that golden rule of spending less than you earn. A budget is how you control that.” Think you can’t budget around the holidays? Think again. You can use these helpful budgeting tips all year long!
Follow the Rules
One guideline of budgeting is the 50/30/20 rule. In the simplest terms, 50% of your income should go to your needs, 30% for wants, and 20% for savings.
What’s a need? For most people, that will include housing costs, whether that’s rent and rental insurance or mortgage payments and homeowner’s insurance. Beyond that, spending priorities can vary greatly. Essentials also might include groceries, car payments, cell phone bills, and utilities.
Wants would fit in the flexible spending category. They might include eating out, going to the movies, buying clothes, or other day-to-day expenses that can vary greatly from month to month.
Finally, the 20% you save should go to your financial goals, whether it’s short-term goals, such as saving for a vacation, or long-term goals like funding your retirement.
These guidelines can be adapted to your personal situation. “It’s okay to set your own ratios,” Weliver says. “But the goal is to try to live so that your essentials are 50 percent or less of your income, and then you have money left over.”
Organize Your Money
Once you set your budget, there’s a good chance you’ll need help tracking your progress. You may want to do so using an Excel spreadsheet, a pencil and paper or an online budgeting tool.
You may even try the envelope method, for which you use cash that you divvy up between a number of category-labeled envelopes. Once an envelope is empty, you’re done spending for that category that month. It’s an extreme strategy, especially in today’s world of plastic and online payments, but it really works.
Mvelopes digitizes the envelope strategy. It offers a free version, as well as a premium option for $95 a year that comes with additional features, such as the ability to link more than four accounts and create more than 25 envelopes.
Weliver suggests a twist on the envelope method: Try using different bank accounts for different types of spending. One account can be reserved for your fixed essential costs, another for groceries, another for dining out and so on. Of course, you need to make sure you are using fee-free accounts.
Focus on Repaying Debt
If you’re carrying a lot of debt, it can quickly consume your budget.
The minimum amount due on any debt you have must count among your essential expenses. Ideally, you want to pay more than the minimum, even if it means socking away less in savings and investments. “Paying down debt is a form of savings,” says Weliver. The faster you pay off your debt, the more you save in interest charges.
There are two common approaches to paying off debt. With one, you tackle the balances with the highest interest rates first. This one will save you the most on interest charges in the long run. The other strategy, often called the snowball method, involves paying off the smallest debt first, which makes you feel good and encourages you to keep rolling until your debt is gone.
If you are carrying a lot of high interest debt across multiple accounts, it may make sense to consolidate or refinance those loans.
Mint is the reigning king of free budgeting sites and apps, but there are tons of other options that work pretty similarly.
The big idea: You connect the site to your accounts with other financial institutions. The site then tracks all of your money’s movements in one place, automatically categorizing each transaction and organizing your expenses into colorful charts and graphs to help you identify spending trends.
Set Spending and Saving on Autopilot
Once you have your budget in place, setting up automatic contributions for your savings and automatic payments for regular bills can make it a breeze to stay on track. Some companies even provide discounts to people who sign up for automatic payments.
Two apps can help you automate your savings further:
- Acorns rounds up to the nearest dollar on every purchase you make with a linked checking account and automatically invests the change into a diversified portfolio for you. You can customize your risk tolerance and adapt your investments based on personal preferences.
- Digit monitors your spending habits and, when it determines you can safely afford it, transfers a small amount of money (typically between $5 to $50 every few days) from your linked checking account to a special Digit savings account.
Automating your budgeting and spending will encourage you to save more and make it easier to achieve your financial goals, even when you’re holiday shopping too!