Budgeting your resources can alleviate present debt and prevent future debt by efficiently putting to use every dollar that is earned. Rather than letting your hard earned cash disintegrate into the newest pair of Jordan’s (unless you saved for it of course), keeping track of how you spend money daily is the most important part of money management. Instead of thinking of a budget as a limit, it can give you freedom by putting every dollar in its place. Below are a few budgeting techniques I’ve found helpful, as well as a few budgeting tools that will allow you to be more conscientious in your spending.
Living Below Your Means
It doesn’t matter if you call it a philosophy of life or practice it for financial incentive, living below your means can make any income amount stretch further. For many people, the largest single expense per month is their rent payment. Depending on geographical location, average rent costs can be anywhere between $500 to $2500 for a one bedroom apartment. A good rule of thumb is that your rent costs should be no more than 30% of your entire net income. If you are spending more than this, you could be missing out on savings and investing opportunities. Ideally, you want to reduce your rent costs as much as your preferred lifestyle will allow. Freeing up this income means you can allot it to other things like delicious food and adventurous travel escapes.
Everyone’s income and spending habits are different but here is a budgeting technique popularized by many personal finance gurus that I have found helpful as a starting point. It’s an expense structure that prioritizes income percentages based on fixed costs, financial planning, and any costs that are considered flexible. As the name of the rule implies, 20% goes to financial planning (debt, savings, retirement, investments), 30% to flexible spending (drinks, coffee, out to eat, movies), and 50% to fixed costs (rent, utilities, subscriptions, groceries). These percentages serve as guidelines and represent broad expenses. Below I’ve listed a few examples of customized versions named by their purpose.
50% Fixed costs
5% Emergency Savings
50% Fixed costs
20% Travel savings
50% Fixed costs
Feel free to create your own custom budget with the needs Just multiply each percentage by your net income (after-tax) and boom… You have a budget!
Mint is a fantastic budgeting tool that allows you to connect and view all of your financial transactions from most checking and credit accounts. It can even connect to your retirement and investment accounts for a quick balance update. You can create custom budgets and savings goals all based on your monthly income. It has an alert system that will email you or notify through the mobile app if any transactions exceed your goals. As you monitor your accounts, it’s a good habit to make sure your spending is being sorted correctly so that the budget goals and analysis tools are accurate.
- Net worth
- Reminders and alerts
- Connects banks, credit cards, and investments
- Fully customizable
- Can be complicated
- Time spent editing transactions for accuracy
You Need A Budget (YNAB) is a budgeting tool similar to Mint.com that has it’s own devoted following. While Mint constantly monitors your spending and provides the user with spending analytics, YNAB relies on the user to manually input each expense. This may sound like a flaw, but it’s actually what makes YNAB so powerful. It allows every expense to pass through the user’s attention, bringing to light any problematic spending. YNAB’s philosophy is centered around becoming debt free by helping the user implement a set of budgeting rules:
- Give Every Dollar a Job
Assign any income to a particular budget.
- Save for a Rainy Day
Break down large financial expenses into small monthly ones.
- Roll With The Punches
A budget is a goal. Some months you will exceed it. Some months you will beat it.
- Live on Last Month’s Income
Having a month’s income of buffer allows bills to be paid on time and can help with surprise expenses.
Unlike Mint which offers free services paid for by its ads, YNAB costs a one time fee of $60. If you think the active monitoring approach along with the rules outlined above seem like a good fit for you, they are currently offering a 34 day free trial so try it out!
- Great rule based concepts
- Focused on debt reduction
- Enter expenses manually
- One time $60 fee
- Enter expenses manually
- No bank or credit card connection
- Clunky Interface (For the Accountant Types)
Earlier this year, the cash-only-lifestyle Dave Ramsey released his own budgeting tool called Everydollar. Not unlike Mint and YNAB, Everydollar is another effective money management tool with nice looking graphics and an intuitive interface. it’s definitely geared more towards millennials. Along with the main Budget tab, another one called Baby Steps outlines progression towards built in savings goals like Building an Emergency Fund and Saving 15% Towards Retirement with the final step called Build Wealth and Give. If at any point the user needs advice, there is a Local Advisors tab with links to professional advisors who can help with financial topics like funding retirement and mortgages.
While the free version functions as a great simple budget planning tool, to get the most out of Everydollar, it’s recommended to upgrade to Everydollar Pro for $99. This connects your bank, credit card, and investment accounts to monitor your actual financial transactions, something Mint does out of the box. However, if you like simplicity and don’t mind paying for it, Everydollar is a great and easy way to implement a budget.
- Well designed interface
- Built in savings goals
- $99 to connect banks and credit accounts
Disclaimer: I am not a certified financial planner or advisor nor am I affiliated with any companies or financial institutions mentioned. Any information given is for educational purposes only. I am simply a person with curiosity regarding money matters and hope this article is helpful for those who read it.