Budgeting is something you hear about a lot!
You know you should do it, but it's easier said than done. Who has time to track things down to the penny?
Because budgets feel so restricting, many people just ignore them altogether and wing their finances.
This isn't the most ideal thing to do, and it's how you find yourself at the end of the year going, “how did I spend $1,000 at Starbucks?”
Don't even get me started on what that $1000 on lattes could yield you in returns over 10-20 years for retirement.
So I'm going to cover 3 tips for better budgeting that don't make you feel squeezed or micro-managed.
Have Separate Bank Accounts for Separate Categories
Some people may feel like breaking up their money is going to give them anxiety.
Some people like everything in one place because it's easier. If this is you, that's fine and you should do what makes you feel best.
In the case of you wanting everything in one place, an app such as Mint or Personal Capital may suit you better than using multiple bank accounts.
For those who are open to it, having a few different bank accounts may be a good play for mentally separating your money so that you don't overspend on one category and can't cover another.
This is a good strategy for those who find themselves overspending a lot on one thing or another.
Here's an example..
Bank accounts to hold:
- Checking account for bills & necessities – This is where you deposit all of your income checks and you move money out of this main account to your other accounts easily (thanks to technology). So, you keep the amount you need to pay your bills for the month (plus a little extra cushion), and the rest you can allocate accordingly.
- Checking account for entertainment/fun- Pick the monthly amount you will allow yourself to have a little fun and have it transferred into this account every month. This category is a little controversial if you're trying to pay down debts, but, everyone needs to blow off some steam every once in a while. If you're being smart about it, there is nothing wrong with fitting it into your plan. If you want to take it a step further on maximizing your money, you can get a rewards credit card such as Savor by Capital One which pays you cash back on dining and entertainment. Double win! All you would do is use this specific checking account to pay the bill every month, on time in full (you want to avoid paying ANY interest). If you don't have the money in your account, you'll want to re-think that night out and picture the goals you're trying to reach!
- High-yield online savings account for savings- I talk about online savings accounts a lot. It's for a good reason. These accounts expose you to the beautiful concept of compounding interest and help get your money growing quicker. Everyone growing wealth is using compounding interest in some way! As the cool kids say, It's lit. So basically, when you're working out your budget, this is where the amount you have to save goes. Even if it's just a little bit every month, that's okay. Baby steps!
Putting your money away in the correct “money jars” can help keep you on track and make you realize if you're depleting a certain category too quickly.
If you find yourself running out of entertainment money quickly, maybe you're going out too much.
If you're running out of money in the bills & necessities category too fast, maybe you're budgeting too much for another category, or overspending on groceries.
On the positive side, if you're cash is stockpiling in one category, congratulations! This means you have more money to move towards saving or investing for retirement!
This strategy helps keep you aware and on your toes.
Think of Savings as an Expense
Most people think of savings as “Whatever I have left over after I pay my bills and other expenses, I'll save.”
Why does savings have to be an afterthought?
In fact, you're more likely to NOT save enough when you think of it that way. You essentially give yourself an
Think of savings as an absolutely necessary expense just the same as your rent or car payment.
Here's why:
- You need sufficient emergency funds
- Having savings will help you avoid putting emergencies on high-interest, money sucking credit cards
- Having savings gives you peace of mind and security, which will help you get to the next step of the process in generating future wealth
Look at Your Ratios
This is probably the most useful of the 3 tips.
Debt to income ratios aren't just for when you're applying for a mortgage or loan.
You should know these
There are a few of them, but one that may be the most helpful, is your consumer debt-to-take home pay ratio.
It's actually really easy to calculate.
Your consumer debt is all of your debt except your housing payment (rent or mortgage).
Your take-home pay is the money you take home from your paycheck after taxes and anything else that gets taken out of your paycheck.
Consumer debt
_______________ = Consumer debt ratio
Take home pay
Lets look at an example:
Student debt payment – $150
Car loan payment – $350
Credit card A payment- $50
Credit card B payment- $30
Total debt payments= $580
Take home pay = $3500
$580/$3500 = 16.5% consumer debt to take home pay ratio
So, 16.5% is actually within acceptable standards.
The higher your ratio is, the more you need to work on getting it lowered.
Say you had a 50% consumer debt to take home pay ratio.
The ratio is saying that your consumer debt is half of what you take home every month. That's way too much, and that means you need to put paying down debts at the tip-top of your list when determining your budget.
Seeing the ratio may help kick you into high gear and start nixing expenses you really don't need (like those dang Starbucks lattes).
Another quick tip is that your housing cost (rent, mortgage), should be able to be covered with roughly one week's paycheck (gross pay before taxes).
Ratios are just guides, but they can be very insightful and help put your financial health in perspective, which turns into actions on your part.
I teach more about them in detail in my Maximize Your Money course.
