Budgeting is a way to plan your income and expenses over a period of time so that you can do your best to save or achieve some other goal.
If you’re currently not having success saving money, it’s time to reset your strategy.
If you haven’t started a budget, that’s going to be the first place to start.
How to start a budget
Setting a budget is the best way to become a disciplined saver. To get started, review your bank statements, pay stubs and other financial documents to get an idea of where your money is coming and going.
One budgeting option is to calculate your fixed expenses and then look at your other needs — food, gas, clothing, entertainment, etc. Determine a number for weekly expenses and challenge yourself to stay within that budget.
Set a specific amount, such as $100 a week, and take that out of the bank in cash at the beginning of the week. Use that money for the week and try not to allow yourself to dip into other funds. Then, try to go down to $90 or $80 per week to see what you really need.
Once you’ve grown accustomed to living on your budget, you’ll free more money for saving toward various goals.
Make a budget that is realistic to help you succeed. Sure, we’d all like to save 50 percent of our income each month, but depending on fixed expenses, that might not be possible. If you’re able, use data from the previous year to help you budget. This might help remind you of expenses that happen every year during the same month.
How to make a budget plan
First you will add up all your monthly income, after taxes.
Here is how a budget looks using Bankrate’s Home Budget Calculator.
- Monthly net income: $3,500
- Mortgage and debt: $1,000 monthly rent
- Auto payment: $200 per month
- Other debt payments: $150 per month for student loan
- Electricity: $80
- Cable: $130 (Internet is included in this category.)
- Food: $420 for food. (This includes $300 for groceries, $100 for dining out and $20 for coffee shops.)
- Auto, gas and maintenance: $240 for the month. ($120 budgeted for gas and $120 budgeted for oil change and possible repairs.)
- Auto insurance: $70 per month.
- Home insurance: $10 per month for renters insurance.
- Medical expenses: $60 budgeted for unexpected doctor appointments. Note: Health insurance wasn’t considered because it was taken out before taxes.
- Other monthly expenses: Total of $322. ($172 for entertainment, $100 for clothing and $25 for a haircut and $25 for monthly gym membership.)
- Total expenses: $2,682
Money left over:
- $818 left to save
Of course, unexpected expenses may occur. But if there are no unexpected doctor appointments or auto repairs – and fuel expenses are less than anticipated, for example – that will help increase the savings for the month.
A cash-back credit card may be a smart choice for making your purchases. This is because the cash back that you earn can usually be moved into your emergency savings account. If you develop that strategy, the cash back earning will bypass your checking account and go directly into your savings.
Debit cards can be a good method for people who want to spend only what they have and don’t want to use a cash-only method. But losing out on cash back, unless you are a part of a debit card rewards program, is a major downside.
Consider a budgeting app
A budgeting app can remove some of the hassle of maintaining a budget on paper or a spreadsheet.
Both credit and debit card purchases automatically populate in certain budgeting apps, such as Mint. You go to the website first, sign up and then input your banking login information. After you do this, then you can view your accounts in the app.
Good Budget and Spending Tracker are others budgeting apps that both Android and iPhone users may want to check out. With these apps, you can manually put your income and spending in.
How to save money while budgeting
Always compare prices before making a purchase. Make a commitment to comparison shop for essentials and look for coupons and sales online or in your local newspaper. Then, buy the items with the best value.
Don’t stop there. Take the difference of the amount you paid and the amount you would normally spend on the item and put that money into a savings account. Even if it’s just a few dollars per shopping trip, those small sums will add up.
You can’t spend what you don’t see. Greg McBride, CFA, Bankrate’s chief financial analyst, recommends people get started by automatically setting money aside each payday.
“Set up a direct deposit from your paycheck into a dedicated savings account and build your budget based on what’s left,” McBride says. “If you’re not currently saving 10 percent of your income, that’s the bogey to aim for when you’re setting up that direct deposit.”
Many employers can split your paycheck deposit into a checking account and a savings account. Or if you’re self-employed, schedule automatic transfers from your main checking account to your purpose-based savings accounts on a recurring basis.
What is the 50-30-20 budget?
The 50-30-20 budget is the Balanced Money Formula from Elizabeth Warren and Amelia Warren Tyagi’s book “All Your Worth: The Ultimate Lifetime Money Plan.” Here’s a breakdown:
- 50 percent: Must-haves. These are also referred to as the “hard-core commitments.”
- 30 percent: Wants. You deserve to enjoy some of your money.
- 20 percent: Savings. It’s not the least important. It’s at the end because it is the money you have left over. Some of this can also go toward paying past debts.
The premise is that there should be enough for each of the three categories and they are balanced against one another in a 50-30-20 split. In the book, the formula is compared to getting your cholesterol checked. If you aren’t within the recommended levels, you can work to correct the problem. But if you don’t test yourself, you’ll never know.
How did our sample budget fare in the 50-30-20 test?
In our example:
- Must-haves are at $2,110, or 60.28 percent (over the target percentage).
- Wants are at $572, or 16.34 percent (under the target percentage).
- Savings is at $818, or 23.37 percent (over the target percentage).
So what can the family in our sample budget do? Fixed expenses were the biggest area of opportunity in this sample budget.
Here are seven smart shopping tips for how you can save in line with the 50-30-20 budget:
1. Look for a more affordable living space
Perhaps a place that is a little farther from work, if that would have more affordable rent, might be a good solution to look into.
If applicable, getting a roommate could cut your top expense in half. If you are able to sacrifice comfort and privacy, this might make a significant difference in your monthly budget.
2. Consider a side hustle
If one of the members of the household isn’t working, even a part-time job would help add to the household income. Finding other ways to get additional income might be a way to help your balance sheet each month. A recent Bankrate survey found that side hustlers on average earn $8,000 annually.
Evaluate how you spend your time and see if there is an employment opportunity that can help you earn some extra money each month.
3. Shop around for auto insurance
If you don’t shop around, you’ll never know whether you are overpaying.
“It’s very competitive,” McBride says. “… Or just increase your deductible. As you accumulate more savings, you’re in a position to take on a bigger deductible and reduce your premiums that way.”
Keep in mind that some insurance carriers have loyalty and safe driver discounts. So, switching often isn’t always the best solution. Consider having your auto insurance and renters insurance with the same company to potentially save money, if you don’t already.
4. Save on groceries
Using coupons, making meals that have a greater opportunity for leftovers and joining a warehouse club could be ways to help lower the grocery bill.
Only necessary groceries are considered in the must-have category. Dining out and coffee shops count in the wants section.
5. Cut down on wants
You may have to make sacrifices with your wants in order to reach your savings targets.
Consider going to the baseball game or the movie theater outing – but not doing both. Or perhaps you can go to the baseball game and save money on tickets by getting seats not as close to the field. Or maybe you can have dinner before the game or watch a movie at home instead of at the theater. Maybe a minor league baseball game, instead of a Major League Baseball game, could still be a fun experience with a much lower price tag.
6. Evaluate costs
Is there a way to cut your electricity costs? Does the air conditioning need to be on at night? Are items left on while not in use?
Instead of going to the normal hair salon or barber shop, it might be worth checking out a local beauty school. They might have low-cost haircuts available to give students experience.
7. Pay smarter
Perhaps you can save money by paying your auto insurance every six months. Some insurance companies might charge around $4 a month for the ability to pay your insurance on a monthly payment plan.
Also, when shopping online, you might want to consider a site such as Ebates, which gives you extra cash back. Ebates usually mails your cash-back checks quarterly. Deposit this right into your emergency fund.
Got the budget down? What to do next
If you get to the point where you’re succeeding with your budget, you’re going to start seeing your savings account grow and your debt disappear.
Here are some tips to take your savings to the next level:
1. Accumulate some emergency savings first
If you don’t have an emergency savings account, open one up that has no minimum balance or a low minimum balance. Set the goal of getting at least $500 into this account. Once you accumulate a comfortable amount in your emergency savings, start paying off debt (if you have any) with the highest APR first.
Even though there are some very attractive high-yield savings accounts out there, your credit card balances – and probably your loans – are going to be at a higher APR than the annual percentage yield (APY) that you’re going to earn on the savings account.
2. Save those extra paychecks
If you’re paid every other week, two months of the year are going to be three-paycheck months. This is a great savings opportunity, since you’re already budgeted to live off of two paychecks per month.
“So that’s an opportunity to just slide that third paycheck directly into savings,” McBride says.
3. Take the next step
When you have established an emergency savings account, paid off debts and have additional savings as well, what’s next? Well, it depends on your goals. Now you can look ahead to large expenses, such as education, future automobiles, buying a home and more.
If buying a home is your future goal, you’ll want to see how your total borrowing picture looks. What’s your credit score? What does your debt-to-income ratio (the amount of all of your monthly debts to your gross monthly income) look like? (It should be lower than 36 percent.)