- Budgets can be simple — they don’t have to be tedious and difficult to maintain.
- One streamlined budgeting strategy is the 50/30/20 method in which you allocate 50% for needs, 30% for wants, and 20% for savings.
- Tweak your monthly budget based on your specific financial situation, like paying off high-interest credit card debt or saving for a house.
If you’ve ever attempted to stick to a budget and failed, you’re not alone. Budgets fail — but why? It’s because oftentimes, we feel overwhelmed and burdened by them. They’re boring and tedious, and we often associate them with a sense of deprivation. Instead of focusing on the things we can achieve through financial freedom, we focus on all of the things we can’t have and need to cut out of our lives.
Luckily, budgeting doesn’t have to be a complex process. Below, you’ll find a step-by-step, simple budget guide that anyone can follow.
1. Figure Out the Basics
The first thing to do when budgeting is add up your monthly “needs,” or all of your expenses that are absolutely necessary. This includes things like your rent or mortgage payment, your student loans, other debt obligations (like credit card debt), health insurance, car insurance, public transportation, your monthly car payment, groceries, cell phone bills, utilities, childcare, and more. Sort out everything from largest to smallest.
Next, compare the total monthly cost of your needs with your monthly take-home income. Note any shortfalls or surpluses with your cash flow.
If you have a shortfall: Cut back where you can. The best way to begin cutting back is with your largest expenses. For example, saving $500 per month on rent is likely easier than skipping fifty $10 meals each month. Try to see if there are areas within your biggest expenses where you can cut back. This might mean moving to an apartment with cheaper rent or opting for public transportation instead of owning a car.
If you have student loan payments, consider refinancing. If you have credit card debt, look into whether debt consolidation makes sense for you. Under the right circumstances, debt consolidation or student loan refinancing could help you ease your cash flow each month.
Once you’ve considered the above strategies, you can think on a smaller scale. What are some tiny ways you can cut back on your needs each month? Perhaps there are monthly charges for services you once needed but don’t use anymore. Can you find a cell phone bill or insurance plan that’s cheaper? What about a more affordable childcare option?
If you have a surplus: If your monthly net income exceeds your needs, you’re off to a great start when it comes to your monthly budget.
Once your needs are accounted for, you’ll want to set aside money for savings. This includes an emergency savings fund for unexpected expenses (like car repairs and medical bills), retirement savings, and accelerated debt repayment (if applicable).
Anything you have leftover after your needs and savings can go toward your “wants,” which includes variable expenses like entertainment, gym memberships, personal care items, fun nights out, and travel.
Next, we’ll share a super useful tool for figuring out exactly how to allocate your take-home pay for your needs, wants, and savings each month.
2. Incorporate the 50/30/20 Plan
An easy way to incorporate the simple budget strategy we outlined above is through the 50/30/20 Budget. This simple budgeting plan is easy to remember, and it works like this:
Needs (50%): Housing, utilities, minimum debt payments, groceries, insurance (health, auto and home), etc.
Wants (30%): Shopping, gym memberships, dining out, hobbies, travel, etc.
Savings (20%): Emergency fund, savings, accelerated debt payments, retirement accounts (i.e. a 401k and IRA).
You’ll want to first ensure your needs are met each month. Once your needs are met, you can strive to achieve the allocation outlined above for the savings category. Once your savings are covered, you can use whatever money is leftover for the “wants” portion of your budget.
While providing you with guideposts on how to allocate your income, the 50/30/20 budget lets you maintain control of the expenses and cash outlays the way you wish. No one is going to tell you that your gym membership is too expensive or your Mexico vacation costs too much. So long as you’re working towards these percentages for needs, savings and “wants,” the budget is yours to manage as you wish.
3. Automate, Automate, Automate!
Once you have a simple budget in place, the most important thing is to automate your strategy. For example, you can set up direct deposit or monthly transfers for your savings and retirement accounts. You can also set up automated monthly payments that ensure your loans and credit card bills are always paid on time.
In addition, you should set up alerts from your bank that notify you if your credit card spending goes above a certain threshold. Likewise, you should set up alerts for when your checking account dips below a certain threshold.
4. Adjust Based on Your Specific Financial Situation
When it comes to budgeting, everyone’s financial situation is unique. Some people are single, while others have families. Some people are debt-free, while other people have multiple debt payments each month. And some people have stellar personal finance habits, while others struggle to manage their money.
Below, we’ve offered advice for some of the most common situations that might impact your monthly budget.
Paying Off Credit Card Debt
Perhaps, like countless other people, you’re paying off significant credit card debt. If you fall into this category, your monthly budget will be different than someone else’s.
If your needs are completely covered (including minimum credit card payments), review how you can allocate 20% of your net income each month between savings and additional debt payments towards paying off credit card debt. Consider cutting back on the wants category dramatically in order to accelerate your debt payoff strategy. Credit cards come with high interest rates, which is why it’s important to get out of credit card debt as quickly as possible.
Credit card debt consolidation — which involves combining all of your credit card debt and paying it off in one monthly payment through a personal loan — might be worth considering. It can be a great way to pay off your credit card debt at a lower interest rate, saving you money that could go toward other important monthly expenses. Learn more on credit card debt consolidation here.
Should all 20% of your budget go towards additional debt payments? Or should you also carve out an amount towards savings? With credit card interest rates so much higher than what most savings or investment accounts can earn, you might consider using all of the 20% to more quickly pay off debt. Or, you could allocate even a small amount each month towards your emergency fund or retirement account, especially if employer match is available.
Why? While paying down more of your debt each month will save you interest charges, you might feel more financially motivated by watching your savings grow. Then, when your debt is repaid, you can direct more funds towards your savings since you already started the habit.
Saving for Something Big
If you’re saving for a big expense, such as a down payment on a home, a wedding, or a new car, your monthly budgeting strategy might look a little different. Assuming all of your needs are covered, as well as your emergency savings fund, you can prioritize your specific financial goal.
Figure out how much money you’ll need to save each month in order to achieve your goal. For example, let’s say you’d like to put aside an extra $500 each month toward a down payment on a home or car. Set up a separate savings account designed just for your savings goal, and have $500 from your paycheck deposited into the account each month.
Keep in mind that during this time, you shouldn’t let your retirement savings fall by the wayside. Make sure you’re still contributing some money to your retirement savings — at least what your employer matches with a 401k. Once you’ve saved enough for your down payment or other big financial goal, you can ramp up your retirement savings strategy.
You and your significant other have finally taken the next step and decided to move in together. This can be an exciting time, but also a stressful one. After all, many of the monthly expenses that fit into your needs category will now be split between two people. Plus, survey results show this stress is even greater for millennial women — over half of women say that money is the most stressful thing in their lives.
The first thing you should do when creating a household budget is figure out which expenses will be shared now that you’ve moved in together. This will likely include things like rent, utilities, Wi-Fi, cable, renters insurance, and groceries.
Next, you need to figure out how much each partner will contribute. If you prefer to split everything down the middle, the process will be pretty simple. You’ll each contribute half of everything each month. If one partner makes more money than the other, you might want to contribute different amounts. For example, if one partner makes $100,000 per year and the other makes $50,000, the higher earner might pay for 75% of the shared expenses each month.
Automation will come in handy here. In order to make expense splitting as seamless as possible, consider setting up a checking account that is designed just for these expenses. Every month, each partner will contribute his or her predetermined amount to this account, which will be used to automatically pay all bills at the end of the month.
Take Action Today
One of the best ways to see your monthly budget in action is through a template. Check out this Novi Money tool, which offers a free, easy-to-use budgeting template.
If you’re ready to dive into the nitty gritty details, a budget spreadsheet can be a great way to stay organized. But if you prefer a simpler, more streamlined personal budget, you’re covered, too: If you simply abide by the 50/30/20 rule outlined above, you’ll be in great shape.