You’ve always heard that you should craft a budget, particularly if you’re managing debt, including student loans. However, you may have put it off for too long. Then, you suddenly realize you have no idea where your money has gone, or why you have so little (or even a negative amount) left over at the end of each month.
Don’t worry; it’s not too late for you to begin a more effective budgeting lifestyle. And budgeting doesn’t have to be tedious. There are several financial strategies you can employ to keep tabs on your cash and manage your debt without having to nitpick over every last dollar. Think of them as financial tools to help you build a more secure life.
Here are three “better budget” strategies that may work for you:
This better-budget strategy consists of two simple rules:
- Pull your savings off the top.
- Relax about everything else.
Here’s what that looks like in action.
First, determine how much of your income you’d like to put toward savings. Consider saving at least 20% of your monthly income, although you can slide the scale all the way up to 30% or even 40% or more if you’re especially ambitious. (Extra payments on your debts can qualify as savings.)
On the flip side, you could also start by saving just 1% of your income and then slowly increase that percentage over time.
The remainder of your income each month is left for everything else — regular monthly bills including rent and groceries, or discretionary spending such as going out to eat or to the movies.
With this method, there’s none of the stress and tedium that can come from line-itemizing every dollar you spend. But you also need to ensure the flexibility of the anti-budget doesn’t put you in the red each month.
If you’re the sort of person who operates better with loose guidelines than strict regimens, this anti-budget could work for you. You can also combine the anti-budget method with a more-traditional budgeting strategy if you find it’s too loose by itself.
Slightly more detailed than the anti-budget, the 5-category strategy has been promoted by Today Show financial editor and co-founder of HerMoney Media Jean Chatzky. This strategy breaks your monthly income usage down into five categories with accompanying percentages:
- Housing (35%) —This includes your rent/mortgage, utilities, homeowners or renters insurance, repair and maintenance, etc.
- Transportation (15%) — Includes auto loan payments, gas, car insurance, repairs and maintenance, etc. If you regularly use public transportation instead of a car, this category would include train and/or bus fare.
- Savings (10%) — Your retirement fund, emergency fund, individual savings goals, etc.
- Debt payoff (15%) — Includes credit cards and student loans.
- Other living expenses (25%) — Discretionary spending such as eating out, clothing, vacations, etc.
You can use this plan as a base, and then opt for any number of categories, and adjust the specific percentages that go toward each, depending on your own specific circumstances.
Employing this five-category budget as your standard provides a relatively easy way for you to manage your money. You’ll also have a simple way of knowing if you aren’t meeting your goals, and you’ll be able to make a plan to work back toward the percentages you alloted for each category.
In their book, All Your Worth: The Ultimate Lifetime Money Plan, Massachusetts Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi, helped popularize another strategy for controlling your spending: increasing your savings and paying down your debt. The 50/30/20 plan recommends the following steps:
- Calculate your after-tax income. If you are a traditional employee, state and federal taxes will already have been withdrawn from your paycheck, but you may need to add back in additional deductions such as health insurance premiums or retirement contributions. Self-employed workers will need to subtract any business expenses along with taxes.
- Limit your needs to 50%. Needs include items necessary to basic living: housing, healthcare, transportation, groceries, utilities, etc. Anything that isn’t strictly necessary is classified as a “want.”If your “needs” expenses exceed 50% of your income, you may want to explore ways to reduce them. Get a roommate to help with your rent, for example, or sell your car and rely on public transportation. You might also consider getting a side hustle to help boost your income. You can also re-evaluate what you consider to be needs, because some of those needs may actually be wants. Sure, you need groceries, but you don’t need prime cuts of steak or expensive cheeses. You need shoes, but you don’t need expensive designer footwear.
- Limit your wants to 30%. This is where you start getting into the weeds of how much you’re spending on unnecessary things. This 30% is yours to spend however you want — buy those $5 lattes, go to the salon, say “yes” to designer shoes. But once you’ve allocated your 30%, that’s it. If you blow it halfway through the month on dining out and going to the movies, you may be stuck entertaining yourself at home for the rest of the month.Placing a firm limit on your wants helps you realize just how much you’re spending on discretionary items and forces you to ensure you’re prioritizing your dollars efficiently.
- Spend at least 20% on savings and debt repayments. This includes retirement savings, emergency savings and any additional payments you make toward outstanding debt, such as student loans and credit card balances. The minimum payments on your debts count as “needs” because they’re necessary to keep your credit score in good standing, but anything extra you can throw toward your debt belongs in this category.
You can use our prepayment calculator to estimate out how much you may save by putting extra toward your student loan payment.
By the 50/30/20 rule, if your monthly after-tax income is $2,500, you should be putting $500 a month toward savings and extra debt payments. If this seems overwhelming right now, it’s OK to make this a longer-term goal and adjust the numbers accordingly based on what’s realistic at the moment.
The 50/30/20 method is a good fit for people who really need to get a handle on where their money is going. You still don’t need to track every dollar you spend, but it gives you a strong picture of how your spending breaks down.
Along with engaging in simple budgeting strategies, you might be looking to cut expenses overall, particularly if you’re paying down student loans or other debt. Here are some tips to help you do just that, including cutting your cable service, planning cheap dates, and even making your own cleaning products.
Rebecca Stropoli contributed to this report.