It’s a few weeks into the New Year! How are you feeling about your financial goals? If you’ve been focusing too much on your physical fitness in the new year, you may have let your financial fitness fall to the wayside.
Taking back your financial freedom is easier than ever with endless resources, worksheets, and budgeting strategies. For varying lifestyles, there are various ways to organize and optimize your finances. The ultimate goal is to successfully balance your bills with your discretionary spending to come out on top each month, but how you get there can vary. In this resource round up, we’ve identified a few different budgeting styles that can easily be tracked with your online banking platform at HomeTown.
The “50/20/30” Rule
“Everything in moderation” is the rule of thumb for this budgeting technique, perfected and published by Senator Elizabeth Warren and daughter Amelia Warren Tyiagi in “All Your Worth: The Ultimate Lifetime Money Plan“. You don’t have to sacrifice much to make ends meet, as long as you’re staying within your allotted percentage.
Here’s how in four easy steps:
1. Calculate Your Net Income
Your net income is what you are guaranteed to take home after taxes are taken out. If you have healthcare, life insurance, retirement money, or any other deductions taken out of your paycheck each month, be sure to add them to your total net income. You will later categorize these under needs, but you’ll need to count them in your total budget available to start.
If you have inconsistent pay or additional side income, take the average amount of income from the last three months and include this in your total.
2. Limit Your Needs to 50 Percent
Wants and needs are sometimes hard, but very important, to distinguish. Consider any bill that can be eliminated with only a minor impact on your daily life a want. Any bill that is vital to your survival and success can be considered a need. For example, your groceries, housing, and utilities are all things that should be counted as a need.
Once you have outlined your needs, calculate them to see if they fall within the 50% of budget range. If your bills are exceeding this number, you may want to consider having a stricter grocery budget or talking about adjusting your insurance policies with your agent
3. Limit Your Wants to 30 Percent
Now that you have pulled your needed bills out of the list, you can identify the cost of your “wants”. These wants can include hobby supplies, a gym membership, cable bill, wardrobe and beauty, etc. While these are all things that tend to keep up our morale, they can also keep our pockets empty.
Make sure you limit your spending in this category to 30% of your budget. It may be hard to cut back, but you’ll be happy you did when you’re reviewing your finances at the end of the year!
4. Spend at Least 20 Percent on Savings and Debt Repayment
Your debt payments on your car loan or credit card bill are already categorized as needs, but we encourage you to consider saving 20% of your budget to go towards paying extra each month. Whether you’re paying off your debts faster or simply putting some extra money into your emergency fund, taking 20% each month to care for your finances will have you on the way to freedom.
Want to find out more? Check out the book!
If estimates and flexible spending doesn’t work for you, or you’re trying to keep a strict budget to pay off debt, you may want to consider the more detailed, frugal method of zero-based budgeting. This means accounting for every dollar and penny of your paycheck under a specific category. Money you take in as income and the money you take out in bills, expenses, and savings should equal to zero at the end of each month. This way you know where every single dollar you make is going.
1. List and add up all of your sources of income each month.
You’ll still want to consider the after-tax paycheck, with the cost of insurance and retirement added in. Don’t forget that side-hustle income too!
2. List all of your expenses you have each month, starting with your Needs and moving on to Wants until you spend all of the money you have for the month.
Once you have your Needs listed out, you need to categorize your Wants down to how many cups of coffee you’ll buying at the local coffee shop each month. Every penny will be accounted for, and if you have any left over, we vote you add that to your savings!
3. Update your spending plan each month to coordinate with holidays and annual fees.
It’s important to realize that your spending in Wants and Needs will fluctuate throughout the year! Be sure to consider higher heating bills in the winter and holiday spending. Check in quarterly to make sure you’re on track and planning for the months ahead with this technique.
Try out this worksheet to get started!
The Snowball Method
While this method may not be a full budget method, it’s one of the best concepts for paying off debt! This concept is based on the idea of knocking out your smallest debts first to build momentum in your debt snowball. Here’s how it works:
1. Identify and compare your debt balances.
Layout all of your debt repayment plans and identify those with the lowest balances or lowest minimum payments. You’ll want to start from the bottom and work your way up.
2. Pay off your lowest balance first by paying as much as you can every month over the minimum payment.
After you’re finished with your 50/30/20 or zero-based budget, see if you have a few dollars left over to add to your monthly debt repayment. The more you tack on, the faster they’ll be paid off.
3. Once the lowest debt has been repaid, apply the amount of money you were spending on that to the next lowest payment.
Because you were already spending that money each month, you won’t be missing it when you add it to your next lowest payment. Continue this trend until you’re spending big bucks paying off your highest debts.
You can keep track of all of your debts on one dashboard with HomeTown’s OurCashFlow!
Mix and match these budgeting techniques to make 2017 your most money-managed year ever!