Although it may seem like common practice for adults to create a household budget, just 35 percent of people are active budgeters who follow a strict budget and don’t regularly overspend, according to a recent Willis Tower Watson survey.
“A budget that provides for regular saving and investing will pave the way for life’s rough patches and significant expenses,” according to Warren Ward, certified financial planner and founder of WWA Planning & Investments.
Ward describes budgeting as the “most important thing someone can do.” However, a budget will only be effective if you can live by it, which is easier said than done. Find out how you can create a successful budget for your lifestyle.
How to make a budget that works for you
If you want to make a budget you can actually stick to, here are five key budgeting tips you should follow.
1. Before you make a budget, track your spending
When you make a budget, you’re not making a wish list. You’re creating a document you can follow. This means it needs to be realistic based on what you’re currently spending. U.S. News & World Report recommends tracking your expenses for at least 30 days before trying to make a budget.
After all, if you don’t know what you’re currently spending, then you’ll just be making a bunch of guesses and likely set unrealistic goals. For example, if you’re spending $600 a month on food right now, budgeting $100 a month is setting yourself up to fail.
Tracking your spending for a month will give you a framework to make a budget that works for your lifestyle. If you find you’re spending too much on a particular category, such as eating out, you can adjust those numbers in your budget.
2. Consider a simple budgeting approach
There are lots of different approaches to budgeting. Financial expert Dave Ramsey recommends a zero-based budget in which your budget accounts for every dollar of income you earn. While some people need this level of discipline, others find that type of budgeting stifling.
“Often creating a budget and sticking to it can be overwhelming,” said Magdalena G. Johndrow, certified fund specialist and associate financial advisor at Farmington River Financial Group. “After all, who wants to track every single latte they drink?”
Johndrow’s recommendation is to use a 60/40 budgeting approach, which involves allocating your money into different “buckets” (categories) as follows:
- 60 percent of your money is allocated to required spending items such as housing, utilities, taxes, and food.
- 10 percent of your money is allocated towards retirement. This money may be in tax-advantaged retirement accounts, such as an IRA or 401(k), which come with tax penalties for early withdrawals.
- 10 percent of your money is allocated towards long-term savings. Although this money is invested, it should be accessible.
- 10 percent of your money is allocated towards short-term savings for things like vacations or car repairs.
- 10 percent of your money is yours to spend on anything you want during the month.
- 50 percent of your money goes towards covering needs (groceries, rent).
- 30 percent goes towards covering wants (traveling, dining out, entertainment).
- 20 percent of your budget is put towards savings and debt repayment.
The big benefit to this approach is you don’t have to rigidly adhere to strict rules about what each dollar is spent on, which can be difficult to stick to over time.
3. Build in some wiggle room
Unexpected expenses are bound to crop up during the month, which is why Dave Ramsey and other financial experts recommend providing a buffer in your budget.
If you’ve assigned every single dollar you have to a savings account or a specific category of spending, you won’t have enough money available to cope with a surprise expense. By planning to have at least some money go towards “miscellaneous” expenses every month, you’re less likely to go over your budget.
The amount to allocate towards unexpected expenses will vary depending on how much money you have. Many experts recommend anywhere from around $50 to $200 as a buffer to cover surprise expenses.
4. Don’t forget irregular expenses
According to a Prudential report on the State of Financial Wellness in America, 43 percent of employees surveyed never or rarely planned for irregular expenses. Irregular expenses are bound to crop up, though, whether you’ve planned for them or not. Irregular expenses could include everything from holiday or birthday presents to an oil change or car registration.
To account for irregular expenses, look at your calendar or look back at credit card statements over the course of several months. Look for annual, bi-monthly, or occasional expenditures, and account for these if you make a detailed budget.
If you have large expenses that come up periodically throughout the year — like high costs for holiday gifts — you can also avoid blowing your budget by using a savings account to put a small amount of money aside throughout the year. That way, you won’t have to come up with a huge amount of money all at once that makes it impossible to stick to your budget that month.
5. Automate spending when you make a budget
One of the key ways to make sure you stick to your budget is to make it effortless.
“Reviewing budgets each week or each month is hard to do. Especially if you have a young family,” explained Michael Solari, a certified financial planner for Solari Financial Planning, LLC.
Instead of manually monitoring spending and moving money to where it needs to be, Solari and many other experts recommend automating many financial transactions.
“If you can set your paycheck to automatically flow into each of your buckets, you are guaranteed to save,” Johndrow said. “Having your money automatically withdrawn from your paycheck will also limit your spending, making it more likely you stick within that 60 percent budget. You’re paying yourself first before spending your paycheck.”
This doesn’t necessarily work for every person, though.
“Some people like to be more in control day-to-day and may not be comfortable being certain there will always be enough funds to cover their bills on autopay, “ Ward said.
However, for many, it’s much easier to automatically transfer a desired amount of money to savings accounts then live on the leftovers rather than watch every dollar.
Choosing budgeting tips that are right for you
Ultimately, everyone handles money differently. If you want to make a budget you can live on, the key is to try out different budgeting approaches until you find one you can stick to for the long haul.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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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 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% 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
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
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.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.46% – 6.97%1||Undergrad & Graduate|
|2.57% – 8.44%4||Undergrad & Graduate|
|3.05% – 6.47%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|