Economic indicators may change, but debt remains an issue in the United States. Per the Wall Street Journal, U.S. household debt increased for the 17th consecutive quarter to reach $13.51 trillion. While $9.14 trillion of that debt is mortgages — student loans, auto payments and credit balances made up over $3 trillion. With so many bills to pay for, cost of living rising and wages staying stagnant, developing and adhering to a budget has arguably never been more important.
Let’s look at four budgeting strategies worth considering.
Cash Budgeting (Envelope System)
As much cash as there is floating around, we typically pay for things with plastic. We do this because it’s convenient, often overlooking the dangers of exactly how much we’re spending in the process. This doesn’t happen with a cash-budgeting system, in which every spending category is given a set amount of cash. Once it’s gone, it’s gone.
It’s a bit impractical to pay for certain expenses such as rent or utilities with cash, but for everyday transactions that fill your month, it’s essential to plan and track where every dollar goes. Cash budgeting and envelope systems are essentially zero-sum budgets, as they literally give every dollar a job and purpose. One difference is that zero-sum budgets are based on the month prior, so a little savings cushion is needed.
Credit Card Budgeting
Credit cards can be an unnecessary evil in certain situations, but when they’re used to pay for things we have the money for, they become strategic financial tools. With decent-to-good credit, consumers can open credit cards that give rewards and/or cash back for gas, grocery, restaurants, travel purchases and more. Not only do reward-specific credit cards make sense for the average household to take advantage of, but they also make it easier to track spending across different categories.
Having two savings accounts might seem like overkill, let alone a half dozen, but that’s what some people do to gain control over their spending. The typical budget, as earnest its aspirations, doesn’t work as well for larger expenses, annual events and seasonal fluctuations.
Instead of having your monthly or quarterly budget constantly thrown off, consider using several savings accounts dedicated to specific expenses. To get a handle on holiday spending like thought leader and Freedom Debt Relief CEO Andrew Housser suggests, you may want a savings account strictly for holidays, birthdays and anniversaries; another for taxes and other annual housing costs, such as an HOA; and a third for car expenses like insurance, gas, maintenance and repairs. The strategy can even be extended to leisure areas you’re worried about overindulging in, like eating out or entertainment.
Whether you like tracking your expenses or not, following a proportion-based budget is a flexible, straightforward way to get on track with your finances. The most popular two methods of which are the 80/20 and the 50/30/20 budgets. The latter was developed by Elizabeth Warren and states that 50 percent of after-tax income be dedicated to needs, 30 percent to wants and 20 percent to savings and/or debt repayments. The 50/30/20 requires ongoing expense tracking to be effective, as well as ongoing decisions on what’s a need and what’s a want.
The 80/20 budget, on the other hand, is for people who don’t want to track their expenses at all, as it allocates 20 percent of after-tax income toward savings and 80 percent on everything else.
No matter what budgeting strategy you decide to use, the important thing is understanding where your money goes. When we see our spending in a clear light, we’ll be more motivated to change our behavior for the better.