If you’re like many people, the word “budget” dredges up the same sort of feelings as the word “dentist”—namely stress, anxiety and guilt. Everyone says you should keep a budget, but you keep putting it off until suddenly you realize you have no idea where your money has gone or why you have so little left over.
The bad news is that if you want any sort of successful financial future, monitoring your money is something you can’t neglect for long. The good news, however, is there are plenty of financial strategies that can help you keep tabs on your cash without nit-picking over every last dollar the way traditional budgets do.
Here are three distinct strategies you might find more appealing than a conventional budget.
1. The Anti-Budget
An idea coined by. . . well, myself . . . the “anti-budget” consists of two super 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 towards savings. I personally recommend saving at least 20 percent of your income, although you can slide the scale all the way up to 30 percent, or even 40 percent or more if you’re especially ambitious. (Extra payments on your debts qualify as savings).
On the flip side, you could also start by saving just 1 percent of your income and then slowly increase that percentage over time.
Divide this money among specific savings goals, like building a retirement fund or emergency savings fund, paying down debt and working towards targets like a down payment on a house.
The remainder of your income each month is left for everything else—regular monthly bills like rent and groceries, discretionary spending like entertainment, etc.
Obviously you need to make sure these expenses don’t put you in the red each month, but with this method there’s none of the stress and tedium that comes from line-itemizing every single dollar you spend, like with traditional budgets.
If you’re the sort of person who operates better with loose guidelines than strict regimens, this could be the strategy for you.
2. The 5-Category Strategy
Slightly more detailed than the anti-budget (but not so detailed that you won’t be able to keep up with it), the 5-category strategy offers a happy medium between stressing over every dollar and flying by the seat of your pants.
Created by Today Show editor Jean Chatzky, this strategy breaks your income down into five broad, overarching categories with accompanying percentages:
- Housing (35 percent)—This includes your rent/mortgage, utilities, homeowner’s or renter’s insurance, repair and maintenance, etc.
- Transportation (15 percent)—Includes auto loan payments, gas, car insurance, repairs and maintenance, etc.
- Savings (10 percent)—Features your retirement fund, emergency fund, individual savings goals, etc.
- Debt payoff (15 percent)—Includes credit cards and student loans.
- Other living expenses (25 percent)—Discretionary spending like eating out, clothing, vacations, etc.
If you want to get a little more (or less) specific, you can opt for any number of categories you prefer, but this five-category budget is a nice middle ground between “way too detailed” and “far too broad.”
3. The 50/30/20 Rule
In her book All Your Worth: The Ultimate Lifetime Money Plan, U.S. Senator and Harvard bankruptcy expert Elizabeth Warren presents another strategy for controlling your spending, increasing your savings and paying down your debt. Her 50/30/20 plan recommends the following steps:
1. Calculate your “after-tax income.” For traditional employees, state and federal taxes will already have been withdrawn from your paycheck, but you may need to add back in additional deductions like healthcare or retirement contributions. Self-employed workers will need to subtract any business expenses and taxes.
2. Limit your needs to 50 percent. “Needs” include—you guessed it—those things that are necessary to live: housing, healthcare, transportation, groceries, utilities, etc. Anything that isn’t strictly necessary is classified as a “want.”
If your needs exceed 50 percent, you’ll have to find a way to reduce them. Get a roommate to help with your rent, for example, or sell your car and rely on public transportation. You should also re-evaluate what you consider to be needs. You need groceries, but you don’t need prime cuts of steak or expensive cheeses or a cart filled with pre-packaged foods. You need shoes, but you don’t need several pairs of designer heels.
3. Limit your wants to 30 percent. This is where you start getting into the weeds of how much you’re spending on unnecessary things. This 30 percent 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 percent, that’s it. If you blow it halfway through the month on dining out and going to the movies, you’re 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 make sure you’re prioritizing your dollars.
4. Spend at least 20 percent on savings and debt repayments. This includes retirement savings, emergency savings and any additional payments you make towards outstanding loans and credit card balances. The minimum payments on your debts count as “needs” since they’re necessary to keep your credit score in good standing, but anything extra you throw towards your debt belongs in this category.
The 50/30/20 method is the most involved of the three methods we’ve explored, which makes it 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 stronger picture of how your spending breaks down.
Whichever strategy you choose to use, there are tons of great tools online to help you monitor your money. Here are a few that work in tandem with any strategy:
Mint.com—Link your bank accounts and credit cards to Mint, a free service that automatically tracks every purchase and sorts them into pre-set categories. Pop into your dashboard and you can see at a glance how well you’re sticking to your goals.
Personal Capital—The savings part of money management is often confusing for people. Personal Capital makes it easier by helping you plan and track your financial goals, from net worth to investments to cash flow.
Mvelopes—Whether you’ve got two budget categories or twenty, Mvelopes helps you allocate and track your spending habits using the famous “envelope system,” in which you set aside money for different spending categories in separate envelopes.
Decades ago, people used to budget by putting cash into envelopes marked “groceries,” “gasoline,” and others. Most people pay for things digitally these days, so Mvelopes mimics the envelope experience on a digital platform. This way, you can make online purchases or swipe your debit card without messing up your envelope system.
Using these tools, you can get your money under control without having to use the typical budget model that a lot of us dread.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|