Contributing Writer at Tally
August 17, 2020
You earn money, and you spend money. It’s a relatively simple concept, but managing your cash flow and meeting your financial goals can be difficult if you don’t create a solid budget.
Creating a budget and sticking to it takes time, effort and commitment. Plus, it can be intimidating to dive in. But with the right budgeting tips at your disposal, controlling your finances won't be as challenging as you once thought. In some cases, it's also quite rewarding.
With the budgeting tips below, you'll be on your way to creating a manageable budget that will help keep your finances on track.
These 10 budgeting tips will get you on a solid path to achieving your goals with relative ease.
Having a monthly budget without goals can become a burden. But setting financial goals gives you something to focus on long term. Plus, the smaller victories keep you motivated along the way.
Look at your finances and determine your ultimate objective. From there, see if you can create a few milestones on the path to that goal.
For example, if your long-term goal is early retirement, your milestones may include:
Building an emergency fund
When setting your financial goals, make sure to choose ones you control directly. Setting goals you can’t control, like getting a raise or a promotion, can end in disappointment. It's OK to strive for these, but they shouldn't be part of your financial plan.
You have many budgeting methods to pick from, so choose one that fits you best. Consider the time it’ll take to manage this budgeting method, its complexity, the margin for error and other variables when choosing the right one for you.
Remember: A technique that works for one person may not be the most effective for you.
A few of the most common budgeting methods include the 50/20/30 budget, envelope budgeting and zero-based budgeting.
The 50/30/20 budget divides your take-home income to three broad categories:
With this method, you put 50% of your take-home income toward needs. Needs include your debt and items you can’t live without, such as:
Minimum monthly debt payments
Basic cell phone package
Wants should account for 30% of your take-home income. These include all the items you enjoy but could live without, such as:
Cable or streaming services
Full-featured cell phone package
Nights out with friends
Finally, 20% of your take-home pay will go toward savings, like an IRA, 401(k) or a high-yield savings account.
Because it uses broad categories as catchalls, the 50/30/20 budget is great if you just don’t have the time to budget every expense into its own category. But with such broad categories, you may accidentally spend too much on one necessity, leaving yourself without enough in your budget to cover another.
Envelope budgeting involves withdrawing cash from the bank and putting the budgeted amount for each expense category in an envelope specifically for that category.
For example, if you have a $400 monthly grocery budget, you’d put $400 in cash in an envelope labeled “Groceries.” You’d repeat this for entertainment, utilities, dining out and other categories.
This budgeting method is great if you struggle with overspending because once the envelope is empty, there’s no more money to spend. The downside is there’s no plastic allowed, and you may find it difficult to abandon using your debit or credit card in favor of making cash payments.
With the zero-based budget (ZBB), you assign a job to every dollar you take home. This doesn’t mean you spend money frivolously, though.
You categorize and add up all your monthly expenses — needs and wants — and subtract them from your take-home income. You then assign 100% of the leftover money to a financial goal, like retirement savings, debt repayment or saving for a down payment on a car.
For example, say you take home $3,000 per month and spend $1,500 on your mortgage, $500 on groceries, $250 on your car payment and $250 on entertainment. With a ZBB, you’d dedicate the remaining $500 to paying off your debt or growing your savings. Doing so ensures you have no cash left unspent at the end of each month.
The ZBB is an excellent option if you want to be in total control of every dollar. It allows you to make small adjustments along the way, making it ideal if you have a variable income. However, ZBB can be time-consuming. If you fall a few days behind on expense tracking, you may spend hours trying to catch up.
Before computers and smartphones became parts of our daily lives, a notebook and a pen were the only budgeting tools. With computers came spreadsheets and other budgeting software that made life easier. Smartphones expanded on this with full-fledged budgeting apps you can carry with you in your pocket.
Today, budgeting apps and software are far more advanced, and you should take advantage of them. Not only do most connect to your accounts and automate large portions of your budgeting process, but many save your budget in the cloud, so you don't have to fear losing all your hard work if your computer crashes.
Also, many of these budgeting apps are free or have minimal costs.
It's relatively easy to list your monthly expenses and add them to your budget, but not every expense comes monthly. Some come bimonthly, quarterly or even annually, and you must account for them within your monthly budget.
Add up the yearly total for these expenses and divide that number by 12 to get the monthly cost. Enter that monthly amount into your budget each month.
Since you won't pay that amount every month, it may be worthwhile to set up a separate savings account to transfer that monthly amount to for safe keeping.
For example, if you have $1,200 in yearly HOA fees, you would transfer $100 into a separate savings account each month. When the HOA fees are due, you transfer the cash back to your checking account and pay them in full.
Financial experts often suggest paying off debt and saving for retirement. That’s because having no debt saves you money on interest, and retirement is a common goal of many people. Oftentimes, these suggestions push people to assume debt repayment and retirement savings should be their priority when budgeting.
Though debt repayment and retirement savings are high on the financial goals list, your priority should be building an emergency fund.
An emergency fund can help you cover unexpected expenses that pop up, like a leaky roof, car repairs or medical emergencies. An emergency fund can also help if you lose your job.
Without a sufficient emergency fund, you may resort to credit cards or emergency loans to cover these costs, which can put you deeper in debt.
Your emergency fund should cover 3-6 months of living expenses. Depending on your disposable income, this could take a long time to build. You can always start with a smaller emergency fund — maybe $1,000 — and revisit building your emergency fund once you pay off your debt.
When building your emergency fund, it’s important to choose a savings account that's easy to access and transfer money to and from. If the account doesn’t offer an easy online transfer option or takes multiple days to initiate a transfer, this could put you in a bind if an emergency arises.
It’s also a good idea to choose an account with the highest interest rate. Today, it's not uncommon to see savings accounts that offer 1% to 1.5% interest.
You won't retire off the interest, but it's free money that adds up over time.
For example, if you leave a $9,000 emergency fund for a year in a high-yield savings account that pays 1.5% interest, you'll earn $135 that year.
What's more, that interest compounds, so the following year's interest calculation will be based on $9,135 instead of $9,000. This will earn you $137.03 in interest.
Having a savings goal is critical in budgeting, whether it's building an emergency fund, saving for a car, funding a retirement account or saving a down payment for a new home.
Automating your savings eliminates the need to log into your bank and manually initiate a transfer. Doing so not only reduces your to-do list, but it also helps ensure you’re not tempted to skip a transfer (or accidentally miss one).
Log onto your online banking website or your bank’s mobile app to find out if recurring transfers are an option. If so, schedule fixed monthly transfers that fit your paycheck and bill schedule so you hit your savings goals without lifting a finger.
There are many ways to tackle debt repayment, and none are one-size-fits-all solutions. Everyone's financial situation differs slightly, so review your finances and determine which debt repayment plan works best for you. Some of the more common debt repayment plans include debt avalanche, debt snowball and debt consolidation.
With the debt avalanche method, you pay as much as you can toward the debt with the highest interest rate, while making only the minimum payments on all other debts. Once you repay the debt with the highest interest rate, you move on to the debt with the next-highest interest rate and repeat this process until you pay off all your debts.
The debt avalanche method is especially popular with credit card debt and is used by Tally.
Because the debt avalanche method prioritizes debts with the highest interest rate, it can greatly reduce the amount of your cash going toward interest charges.
With the debt snowball method, you prioritize paying off the debt with the lowest balance first, while making the minimum payments on all other debts. Once you pay off the first debt entirely, you move on to the debt with the next-lowest balance.
The debt snowball method won’t save you as much money on interest charges as the debt avalanche method, but the small wins from paying off the low-balance debts quickly can help keep you motivated.
Debt consolidation is another debt repayment method, in which you take out a personal loan or line of credit to pay off your high-interest debts. You then make a single payment on the loan or line of credit for a fixed period.
The key benefit is it simplifies your debt repayment process by converting multiple monthly payments into just one — often at a lower interest rate. The downside of debt consolidation is you need good credit if you want to get approved for a loan with a favorable interest rate.
When budgeting, it's easy to become so laser-focused on reining in your spending habits that you overlook one necessary part of life: entertainment.
Include at least a small amount of money each month to cover entertainment, including dining out, seeing a movie or meeting friends for drinks.
Though it may not seem like the most prudent way to manage your cash, having a little spending money for yourself can play a key role in keeping you on budget and avoiding overspending.
This little bit of extra spending cash just for you can help satisfy your urge to spend, help you decompress by enjoying a night out now and again and prevent budgeting burnout.
Finances are rarely set in stone, as they tend to have small month-to-month fluctuations. When budgeting, plan for fluctuations in income and surprise expenses by leaving some wiggle room in your budget.
You can create this wiggle room by budgeting in a small amount each month that you set aside. No matter how big or small the amount is, include it in your budget each month. If you don’t use that cash, roll it over into the following month or add it to your emergency fund.
Budgeting requires regular expense and income entry, monitoring and adjustment. You’ll spend time on various tasks like updating income and expenses as they change, keeping an eye on fluctuations in your monthly bills and making small tweaks to your budget to accommodate any changes.
If you leave your budget unattended for too long, you may find yourself suddenly buried under transactions, which can make it difficult to track.
Instead of letting the work pile up, set aside time for budgeting. Depending on how many transactions you need to monitor, you may want to set up a weekly, twice-a-week or even daily budgeting schedule where you enter and track transactions and check your budget for any fluctuations.
Make sure your family knows your budgeting schedule so they know when not to disturb you.
With plenty of budgeting tips at your disposal, you're ready to start creating your own budget and working toward your financial goals. Starting a budget today will put you one day closer to hitting those goals, whether it's saving for a home, repaying debt, retirement or saving for a down payment on a car.
Use these tips to start building your budget, controlling your cash flow and marching toward your goals.