To many people, the word “budget” is often met with a negative reaction that's about as welcome as a migraine. Why? Because most people don't know how or where to start. Budgeting can be a constant struggle. But once you have a plan, it becomes an easy way to spend less, save more, and get out of debt. By using one or more of the following three techniques, you can establish a household budget that's easy to establish, follow, and stick to.
1. The 50/20/30 rule
This budgeting technique is a simple rule of thumb for seeing where your money is going every month. It should be used as a starting point for creating a budget when you simply don't know where to begin. It works by dividing your money for spending and savings into three parts (after taxes).
Here's how the 50/20/30 rule works:
- 50 percent of your budget should be going toward necessities (things you need to get by with every day): rent/mortgage, food and clothing, utilities, transportation, etc. Under the rule, these expenses should make up approximately 50 percent of your take-home pay.
- 20 percent of your take-home pay should be going to long-term savings and extra payments on any debt you may have. Basically, this 20 percent is allocated toward financial priorities that include contributions to your 401(k) or IRA.
- Lastly, no more than 30 percent of your take-home pay should be used on lifestyle choices such as entertainment, pets, eating out, cell phone plans, vacations, shopping, etc.
2. The snowball budget
This technique allows you to reduce debt by tackling your smallest balances first. It can be a simple yet beneficial way to get out of debt if you're struggling to create some type of repayment system.
First, make a list of all of the debts you have, with the debt with the lowest balance at the top of the list. Next, make minimum payments on all of the debts except for the one at the top of the list. For the debt at the top, pay the absolute maximum amount you can on that debt until it's gone. Once you've paid off a debt, there's a new debt that takes its place at the top of the list. More importantly, there's also one fewer.
The objective is that once you pay off a debt, the amount you can apply to remaining debts is a little bigger - much like a snowball rolling downhill. It may not be rocket science, but it's a place to start. More important, paying off debts (even the small ones) can be very empowering, encouraging you to keep going and do more.
3. Online budgeting tools
Technology has overshadowed many of the outdated budgeting techniques that our parents used. The following are just a few of the easy-to-use online money management tools that can help you better track your spending:
Mint.com allows you to easily track all your accounts: checking, savings, credit, loan, and investment. It's free, and you need only an email address and a zip code to get set up with a password.
Budgettracker.com is also free, and may be a good choice if you don't feel comfortable linking your bank accounts directly to a budgeting site.
Mvelopes is a modern spin on the traditional envelope budgeting method. It's free, and can help you not only manage your monthly bills but also help you plan for future expenses.
The Birdy is a good budgeting tool to use if you just want to record your purchases and track your spending. Its concept is simple, so if anything “techy” sounds complicated to you, this might be a good tool to take for a test drive. It's free, but offers some paid plans if you want a few more bells and whistles.
For many of us, our biggest problem isn't that we don't make enough money, but that we spend too much.
And while there isn't a one-size-fits-all budget, these techniques can help shine a light on where you should be making some changes to reduce your expenses.