By: Kristin Bugden
Talking about finances can sometimes seem about as interesting as taking a trip to the DMV. However, it’s important to be knowledgeable about this topic for the sake of your future. One bit of financial advice that comes up time and again is that you need a budget to help figure out where your hard-earned cash should go. We recently spoke with Shannon McLay, the CEO and Founder of The Financial Gym – a company that takes a unique fitness-inspired approach to your finances – about tips and tricks when it comes to budgeting, so read on below to get motivated and find a budget that works for you.
Lively: So, where does one start if he or she is new to budgeting?
Shannon McLay: Hearing the word budget is about as fun as hearing the words “diet” or “root canal.” And yet, a budget is one of the necessary keys to financial health. What is the point of setting goals for us if we don’t know whether they are achievable or not? The only way we can truly determine the attainability of our goals is by setting a budget.
Like any other goal that involves putting in hard work and sweat, strengthening your budgeting muscles requires getting on a plan that’s the right fit for you. Learning how to budget using a technique that’s sustainable means being familiar with the many options you can try.
L: Makes sense – what are some of the budgeting options out there?
SM:I’ll start with the Goals-Based Budget.
At The Financial Gym, we’re all about setting goals and planning your finances, accordingly. A goals-based budget helps you accomplish just that by first putting money toward your most important aspirations and dreams — whether that’s buying your first home or saving money for your child’s college fund.
How it works: The first thing to decide is what percentage of your income you want to put toward monthly savings. Generally, our clients find success in setting aside 15% of their gross income for this purpose. You’ll then need to determine what your other savings goals are (e.g. saving for a vacation, saving for a major home repair, etc.).
Now that you have the overarching vision set (i.e. a set figure to save toward a savings goals you want to achieve), automate the savings process for your top goals so funds are automatically deposited from your checking account into sub-savings accounts for each of your goals.
Whatever is left in your checking account can then be used for monthly bills and discretionary spending.
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The 50/30/20 budget is a broad guide to help you tackle three core budgeting areas: needs, wants and savings.
How it works: To start using this budgeting principle, you’ll need to know your net income, meaning your income after taxes are taken out of your paycheck. If you have certain expenses, like health insurance (a “need”) and retirement (a “savings” goal) automatically deducted from your paycheck, add these back in since they factor into your 50/30/20 budget.
The general rule for this budgeting system is to allot 50% of your take-home income to needs, such as your rent or mortgage, car payments, health insurance, and bills; 30% of your income toward wants, like dinner with friends, or splurging on a new outfit; and the remaining 20% of your net income for paying off debt or reaching savings goals.
Once you’ve determined your net income, calculate the dollar amount of each of these percentages to get how much your budget is for needs, wants, and savings. For example, if your after-tax income is $4,500 per month, your breakdown looks like this:
Needs - $2,250
Wants - $1,350
Savings - $900
The goal is to restrict your spending in each category to these percentages so that you can manage monthly financial responsibilities today and, in the future, while also giving yourself leeway for fun spending.
A percentage budget approach is great for people who have fluctuating income. With a percentage-based budget, you determine the percentages of what should go to various aspects of your finances, and every time a dollar comes into your household, you split it up according to the budget. For example, 70% goes to required expenses like mortgage, food, and utilities; 20% goes to savings; and 10% goes to splurging.
In this approach, you allocate every last dollar of income to a specific expense or goal. For example, if you earn $2,000 a month, then your budget would allocate every last dollar to a line item like rent, savings, food, etc. This is great for people who lack focus and the zero-based budget forces you to focus your money.
Having a purpose in everything you do can make getting to your end goal more meaningful. With the zero-sum budget, every dollar you take home is also given a purpose. Instead of having cash sitting idle in your checking account which increases the likelihood of being carelessly spent, the goal with this budgeting approach is to “spend” each dollar (i.e. assign each dollar a role).
How it works: Take a look at your pay stub to see how much after-tax income you have to start your budget. The next step is to review your checking account transactions to see where your money has been going the past two to three months. Identify which major categories your money tends to go to; your list might look like this: mortgage payment, fast food or restaurants, emergency savings fund, car repairs, fitness memberships, childcare etc.
Now for each of the main categories, estimate how many dollars you want to assign to each area. When determining these estimates, you’ll need to account for fixed expenses (e.g. emergency savings and fitness memberships), as well as spending that fluctuates, such as fast food and car repairs. When working with variable estimates, it’s best to overestimate.
If you find you have more funds left over in one category, reassign it to another “job” that can use the extra money.
L: Do you have any general tips for someone who’s found a budget that works for their lifestyle?
SM: Absolutely. For starters, most people who use cash cannot recall what they spent their money on. Try using a reloadable prepaid card for your weekly budget. This will give you insight into wasteful spending that can help you stay on track. Additionally, if you're trying to stick to a weekly budget, but don't like using cash, set a weekly goal for yourself and pay off your credit card at the end of every week so that your balances don't accumulate, and you can keep yourself in check! Another good tip is that if you're trying to stick to a budget at a certain place, like a coffee shop, buy yourself a gift card there and once you’ve spent all, you're done spending money at that particular establishment for the month.
If one budget doesn't work for you, don't throw in the towel, keep trying new ones until one or two of them stick and keep you on track. Budgets are similar to diets or lifestyle changes, but just like finding the right diet, you can find the right budget method for you, and when you do, you will find yourself reaching your goals faster. It is not enough to just set your compass to where you want to go, you need the roadmap to get you from A to B and your budget is the best roadmap for your financial journey!