Only 47% of Americans use budgeting methods to keep close track of their spending, according to a 2020 survey by the National Foundation for Credit Counseling. But as the most fundamental tool in the financial planning process, a budget can make it easier to achieve your financial goals.
Not only does a budget help you keep track of where your money is going, but it also gives you more control over that process. Without a clear plan for your cash flow, you could be spending against your own best interests without even knowing it.
Read on to learn…
- How a proper budget can power your financial independence
- 5 budgeting methods to consider
- Why you shouldn’t give up on your budgeting method
Budgeting isn’t always fun, but it’s one of the most important things you can do to improve your financial health. Here are a few ways that living on a budget can make a difference.
- It aligns your spending with your goals. By creating and following a budget, you can decide how you’re going to spend your money each month based on what’s most important to you.
- It can improve your debt repayment strategy. If you’re working to pay off student loans, credit cards or some other type of debt, having a budget can help you set aside more cash to become debt-free.
- It can help you achieve your savings goals. Whether you want to save more for retirement, build your emergency fund or set aside cash for your next vacation, a budget can help you plan out how much you’re going to save toward your goal at the beginning of the month.
Before picking a new or different budgeting method, you might want to figure out where your money is going so that you know what areas need your attention.
“An easy way to get things started is to collect all of your receipts for a month or two for every penny you spend,” said Megan Luke, a chief operating officer at PNC Bank. “At the end of the month, sort the receipts into piles for food, gas, entertainment and so on. This will give you a good picture of your current spending and provide opportunities to find ways to adjust and perhaps save.”
You can also use your online checking or credit card account to view your transactions and do the same.
Once you have an idea of your spending habits and where you can make changes, five different budgeting methods can help you make it happen. No single budgeting method is best for everyone, so it’s important to compare each and determine what works best for you.
|Budgeting method||Good for…|
|1. Zero-based budget||Tracking consistent income and expenses|
|2. Pay-yourself-first budget||Prioritizing savings and debt repayment|
|3. Envelope system budget||Making your spending more disciplined|
|4. 50/30/20 budget||Categorizing “needs” over “wants”|
|5. The ‘no’ budget||Lowering and avoiding debt|
The concept of a zero-based budgeting method is simple: Income minus expenses equals zero.
This budgeting method is best for people who have a set income each month or at least can reasonably estimate their monthly income. After calculating your monthly income, add up your monthly spending and savings to equal that income amount.
It’s important to plan out all your expenses as accurately as possible. If you go over on one spending category, you’ll need to take cash from another category to make up for it. And if you forget a large expense, it could throw your budget off.
“[Zero-based budgeting] is the most time-consuming method because you have to dig into the details behind each line item,” Luke said.
Since there’s less room for error with a zero-based budget, it might be a better option for someone who has already been budgeting for a while. Even then, it’s a good idea to keep extra cash in your checking account as a buffer. Also, have at least a small emergency fund in case you incur a large unexpected expense.
The pay-yourself-first budget is another simple budgeting method that focuses primarily on savings and debt repayment.
Simply put, you set aside a specific amount every time you get paid for savings and debt payments, then spend the rest of your money however you see fit. By doing this, you can prioritize your savings and debt repayment goals and make do with whatever is left over.
For example, you may want to focus on paying off high-interest debt first while slowly building up an emergency fund. But as you get rid of your high-interest debt, you could focus on other savings goals.
Of course, it’s important to prioritize your necessary expenses and bills. But you don’t have to watch where you spend your discretionary income because you’ve already taken care of what’s most important to you.
This budget is best for someone who struggles with saving each month or doesn’t want to focus too much on budgeting each expense.
This budgeting method is similar to the zero-based budget but with one big difference: You do it all with cash. In an envelope budgeting system, you plan out how you’re going to spend your money each month and use an envelope for each spending category. Then you withdraw as much cash as you need to fill each envelope based on your budget.
As you go grocery shopping, for instance, take your grocery envelope and pay for your items with cash. If you run out, that’s all you can spend in that category for the month unless you want to take cash from other envelopes. Avoid raiding other envelopes too often, though, because it can cause a snowball effect and you can run out of cash before the end of the month.
Financial expert Dave Ramsey is the biggest proponent of the envelope system, so it’s a great option for people who espouse his beliefs about money, which focus heavily on paying down debt quickly and using cash, not credit cards.
But it’s not a good budgeting method for someone who doesn’t feel comfortable having that much cash on hand or prefers using credit cards or debit cards.
The 50/30/20 budgeting method is straightforward and requires less work than the zero-based and envelope budgets. The idea is to break down your expenses into three categories:
- Necessary expenses (50%)
- Discretionary expenses (30%)
- Savings and debt payments (20%)
This budgeting method is a great option for newbie budgeters because it doesn’t require meticulous tracking of all your expenses. You can succeed with this budget as long as you know what counts as a want versus a need and put enough money toward savings and debt.
The main drawback is that the 50/30/20 rule might be unrealistic for people who have a lot of debt or have big savings goals because 20% isn’t a lot.
But the good news is that you can customize it to fit your needs. For example, you may want to consider increasing the savings and debt repayments category and decreasing the discretionary or necessary expenses categories.
In other words, don’t get stuck on the 50/30/20 proportions. Tailor the concept to your needs.
As the name suggests, this different budgeting method consists entirely of not spending money that you don’t have. Rather than create a budget:
- Keep an eye on your checking account balance. Use a budgeting app or your bank’s online banking or mobile app to help you track this.
- Know when recurring bills hit your account. One way you can do this is to keep a list handy in a spreadsheet, Microsoft Word document, or on a piece of paper.
- Set aside cash for savings and extra debt payments. When you can, use automatic transfers from checking to savings and increase your automatic monthly debt payments.
- Spend what’s left over without overdrawing your account. Again, by keeping an eye on your account balance, you’re better able to know how much money is available after core expenses.
While the “no” budget sounds easier than the other methods we’ve listed, it’s not always easy to tell yourself “no.” This budgeting method is best if you’ve demonstrated spending discipline in the past and are confident that you can continue that streak.
Also, it’s best if you use only a debit card with this budget because it’s tied directly to your checking account and automatically updates your balance.
Even if you pick the right budgeting method, it can still take a few months to get used to the system, especially if you’ve never budgeted before. But like any habit, the more you do it, the easier it becomes.
Think about why you want to take more control over your money management. Consider your goals and why you want to achieve them. Doing this can help you regain your motivation to keep working to improve your budgeting skills.
Also, don’t be afraid to make changes to your budgeting strategy to make it more effective. For example, try a different budgeting method if one isn’t working for you, or make adjustments to one to tailor it to your needs. And consider using a budgeting app to help make the process easier.
Whatever you do, the important thing is that you develop the habit of managing your money in a way that helps you improve your financial health and achieve your goals.
Andrew Pentis contributed to this report.
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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of Feburary 1, 2021.
2 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 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% 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 October 26, 2020, 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 10/26/2020. 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 [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 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.
3 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.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.
4 Important Disclosures for SoFi.
5 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of January 4, 2021. Information and rates are subject to change without notice.