5 Budgeting Strategies to Get Your Finances Back on Track
If you completed your mid-year check-in and found that your budget is derailing your goals, it’s time to dive deeper into your budgeting strategy.
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.
1. Goals-based budget
At The Gym, we’re all about setting goals and planning your finances, accordingly. A goals-based budget helps you accomplish just that by putting money toward your most important aspirations and dreams, first. 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, Gym 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 and 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.
2. Envelope system
The envelope budgeting system has been around for decades and it’s no wonder why. It’s a useful budget strategy for those who find they overspend via credit card on non-essentials, like dining out and shopping.
How it works: The envelope system relies on allocating paper envelopes and a cash-only budget for your monthly spending. Think of the discretionary categories you tend to spend too much money on each month; these categories might look something like this:
Personal care/ grooming
Once you have your personal list of envelope budgets, you’ll then decide how much your budget is for each category. For example, you might choose to limit your monthly shopping budget to $150, your entertainment budget to $100, and your personal care budget to $50.
Then, at the start of each month withdraw the exact cash amounts for each budget and place the allotted cash in its respective envelope. Throughout the month, only use the cash that’s inside the envelope for your day-to-day spending. If you blow your whole shopping budget in one trip at the start of the month, you’ve depleted your entire budget for the rest of the month. On the other hand, if you have extra cash from another envelope budget available, you can reallocate excess cash to another envelope that’s running thin.
The biggest point of this budgeting approach is to 1) avoid credit card purchases, 2) limit ATM visits, and 3) work with your predetermined cash budget only. Don’t forget that outside of the envelope budgeting system, you’ll need to manage your monthly bills, too.
3. 50/30/20 budget
Made popular by Massachusetts U.S. Senator Elizabeth Warren, 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 it back in since these 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, like your rent or mortgage, car payments, health insurance, and bills. 30% of your income goes toward wants, like dinner with friends, splurging on a new outfit. Finally, the remaining 20% of your net income is used for paying off debt or reaching savings goals.
With this net income noted, 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.
4. Zero-sum budget
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 paystub 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:
Fast food or restaurants
Emergency savings fund
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.
5. Cash budget
If you want to know how to budget in a way that’s simple and keeps your week-over-week spending in check, the cash budget might work for you. Instead of focusing too heavily on spending categories, this technique simply gives you weekly budget to work with.
How it works: First, subtract your fixed expenses, like housing, credit card payments, and other bills from your total monthly net income. Next, subtract the amounts you set aside each month for savings. What’s left is your available spending cash for the month.
Break down your monthly spending budget into bite-sized amounts. Divide the remaining amount from your calculation above by four. This new amount is your total weekly spending budget that you can use toward discretionary spending.
Figuring out how to budget in a way that works for your lifestyle isn’t always straightforward. There’s no one “right” strategy for everyone. If you feel like you need help deciding which approach makes sense for your spending habits, reach out to a financial coach at The Gym to see how we can help.