The Federal Reserve reports that consumer debt is on the rise, with consumer credit increasing 9.7 percent in the first quarter of 2022. One of the top keys to financial success is a monthly budget, but there is no one-size-fits-all when it comes to devising and following a plan. A good budget will address your own unique spending needs while also helping you work toward your financial goals.
Line Up Your Tools
Before you set a personal budget for your household, you’ll need to gather your tools. There are some great budgeting apps that can help, or you might prefer a spreadsheet or pencil and paper. What's key is that you find a budgeting method that both meets your financial situation and your preferences.
There are several budgeting processes you can employ. Here are a few of the most popular:
- Category budgeting: This method assigns a percentage of your income to each category. A 50/30/20 budget has you putting 50 percent of your monthly income toward necessities, 30 percent toward items that you want and 20 percent towards paying debts and saving.
- Cash budgeting: For some, using cash for expenses, like groceries and dining out, helps curb spending. Some people use the envelope method, which involves filling separate envelopes with the budgeted amount for each month. When an envelope is empty, you’re done spending for the month.
- Bullet journaling: Planner enthusiasts sometimes find it motivating to track every dollar they spend each day. This helps you break down bigger goals into daily steps, which can help keep you motivated.
Set Budgeting Goals
A successful budget helps you achieve your short-term and long-term goals. Whether you want to pay off your student loans or save for a new car, the first step is to identify those wants and determine what you need to get you there. When setting and following a budget, though, it’s important to recognize that it will take time to reach those goals.
Your take-home pay likely won’t change simply because you have a budget. For that reason, you need to first account for all your expenses including housing, utilities and healthcare. Once you’ve jotted down those costs, you can divide what’s left over to chip away at those goals.
A good budget will address your own unique spending needs while also helping you work toward your financial goals.
Choose Budget Categories
A budget is essentially a spending plan. It serves as a guide for where your money will go each month. For that reason, your monthly expenses should be divided into two categories: discretionary expenses, which you can live without if necessary, and non-discretionary expenses, which aren’t negotiable.
Non-discretionary expense categories may include:
- car payment
- health insurance
- car insurance
- student loan debt
- credit card debt
- parking fees
- pet care expenses
- utilities, including water, electricity and cell phone bills
Discretionary expense categories can include:
- streaming service subscriptions
- dining out
- gym memberships
And, don't forget fun - think hobbies and supplies - and splurge - that amazing experience or purchase that came out of nowhere and you really want.
Build an Emergency Fund
No matter how carefully you craft your budget, some unexpected expenses will pop up each month. If you haven’t accounted for them, this can easily derail your plans. Having at least a few hundred dollars in savings will ensure that you can tackle car and home repairs, medical bills and other emergencies.
But experts recognize that building emergency savings isn’t easy. In fact, one in four consumers report having no money set aside for emergencies. Even wiggling $20 a paycheck into your budget could put you ahead.
Manage Credit Card Debt
Credit card debt is a top money management issue. For many consumers, the answer is simply to pay the minimum amount due each month, which means never making a dent in that balance. If you don’t have an emergency fund, you might find that you rely on your credit cards when life’s unexpected events happen, putting you even farther in debt.
There are several financial planning techniques for credit card debt payoff. Most involve tackling one credit card, paying it off and then using what you were paying toward that card to start tackling another. For some, though, consolidating all that debt into one personal loan with a low interest rate could be a better option.
Once you have your emergency fund in your savings account and your credit card debt under control, it’s time to start thinking about savings. It’s easier than ever to set money aside each month, thanks to automatic savings tools that will move money from each paycheck into a designated account.
But banks often offer fairly low interest rates for their savings. If you can part with the funds for a while, consider a certificate of deposit or even putting money into low-risk investments. The key is to maximize your earnings on every dollar you set aside.
Protect Your Credit Score
Even if your goal is to become completely debt free, your credit score will still come into play. You’ll probably still need loans for big purchases like houses, and lenders will pull your credit report before agreeing to loan money to you. Some banks and credit card companies provide free access to your credit score, but this won’t show you the details appearing on your report.
Once a year, you can pull a free copy of your credit report through AnnualCreditReport.com. This will help you keep an eye on things. Dispute any errors and watch for unauthorized activity on your report to keep your score as strong as possible.
Creating a budget is only the first step. Monitor your spending each month and adjust the amount in each budget category accordingly. Over time, you’ll gain insight into your household’s spending habits that will make budgeting even easier.
This is where tech tools can come in handy. You can find apps that provide a visual of your monthly cash flow so you can see exactly where your money is going. That will allow you to make changes to reduce spending and free up more money to put toward your long-term goals.
Although budgeting won’t guarantee riches, it will put you in control of your finances. Set up a system that you can stick with and that will motivate you to keep moving forward, month after month. It may take a while, but with persistence, you’ll be able to achieve your goals and create a plan to manage your finances well into the future.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.