What types of thoughts or feelings come to mind when you read the word “budget?” For some, budgeting comes naturally, a skill that has been with them since a young age. For the rest of us, we may think, “I should be budgeting,” or “that’s scary and I don’t want to think about it, so I won’t.” Wherever you fall in that spectrum, the hard truth is that budgeting is a necessary tool to keep finances in check. Learning the difference between needs and wants can be a humbling experience. Watching debt disappear is a thrilling experience.
Enough about financial feelings… for now. Let’s dive into some tried and true skills that can help you set up the rest of your financial life. It’s not nearly as scary as the outcome of never looking at your account and using your debit and credit cards like gift cards, swipe until it’s gone.
Grab your budgeting tool of choice to help get started. This worksheet is a good place to start. Sierra’s Money Desktop tool, located inside mobile banking, can cut the work by pre-filling your income and expenses for the past 3 months, and giving you a starter budget.
Understand Your Income and Expenses
First things first, you need to know what you’re working with.
ID Your Income
How much income do you have in your household? This is any money that comes into your account. Revenue from rental properties, alimony, child support, paychecks, you name it. Find the amount that actually makes it to your accounts, after taxes and all those other line items are deducted from your paycheck. Go ahead and jot that total down. Not so scary, right?
Now make a line for every bill that you get. We’re talking car payments, rent/mortgage, heat, hot water, electricity, gym membership, taxes, HOA fees, credit cards, water bills, groceries, gas, all those things. Don’t forget about bills you pay every few months, or even once a year, like auto insurance.
Choose The Right Budgeting Strategy for You
Now you know what you make and what you spend, it’s time to figure out a strategy for staying within your budget. There are many schools of thought on this topic, so take a minute to think about what would make you most comfortable and consistent.
The envelope system works like this: Every budget category gets its own envelope, and each month you put the budgeted amount of cash into the envelope. Then, you only spend what’s in the envelope for that category.
This is a good strategy for those who need a physical, touchable reminder of how much they’re spending, and how much is left. Credit cards and subscriptions can make it easy to ignore expenses and overspend. The envelopes help some people stay on-track in a digital world.
Others choose what is called a zero-based budget. Each dollar you receive has a place to go, and at the end of the month your income minus expenses (and savings) equals zero.
This approach is like the envelope system but doesn’t rely on cash. You can move designated amounts to your savings account, your emergency fund, or checking, and keep a strict eye on what gets spent from there.
The zero-based budget is a great way to get a grip on what you spend and where. For those just starting out, it can help you build a more flexible plan down the line. It does require time and commitment to keep track of your spending, and can be tricky if you have lots of variable expenses or seasonal income.
Budget For Savings
Start Building an Emergency Fund
Sometimes months or even years can pass without needing that extra $500 for a blown tire, or $5,000 for a medical bill. When something does happen, your emergency fund can save you stress, time, and lots of money when the alternative is taking out high-rate debt to cover expenses. Building an emergency fund can start small, and it should start today.
Most experts agree that building up three to six months worth of income is a good emergency fund amount. That way you have enough to get by if you’re ever laid off, or injured and can’t work. Start by building up to a $1,000 fund, and keep adding a little every month. Remember, you can only touch this money in case of emergencies!
Start Saving Automatically
Automatic transfers are your friend! Get all of the money you want to save transferred from Checking to your Savings and Goal accounts automatically, every paycheck. This makes it harder to spend that money—just make sure you know how much is in your checking!
Budget For Debt Payments
Most of us have debt of one kind or another, so let’s face this head-on. There are two common methods to budget for debt.
The Snowball Method
The Debt Snowball focuses on paying each of your debts all the way off, starting with the smallest balance. You’ll make the minimum payment on all of your loans, then put anything extra you can afford toward the smallest balance loan. When that loan is paid off, you’ll move extra funds to the new smallest loan.
This method is great for those who want the little wins of paying a loan all the way off. It can be hugely motivating, and keep you on track to get through the rest of your payments. But, this method doesn’t prioritize loans with higher interest, so you might end up paying more overall.
The Avalanche Method
The Debt Avalanche is focused on minimizing the amount you pay in interest overall. You make minimum payments on all loans and put extra funds toward the loan with the highest interest rate. Once that’s paid off, you move to the next highest rate loan.
This method helps you spend less on interest payments over time, and can end up saving you lots of money. But, it can take longer to get that first loan paid off, so you need to be ready for the wait.
Either way, planning to pay off debt is a step in the right direction. You can add all of your debts and see how Snowball and Avalanche methods will work for you in our Money Desktop tool. Just login to online banking and find it in the menu to get started.
Be Budget Accountable
Just like with anything, it takes practice to get good at living within your means. We suggest these steps to help you stick with it!
Set aside a few minutes each month to review last month’s spending and plan for next month. Did you go overboard on eating out last month? Need to set aside some cash for an upcoming expense? Actively keeping an eye on your spending—without being ashamed for missteps—is critical to staying on track.
Also use this time to check on and celebrate the wins. Watch your savings grow! Watch your debt be paid down! The changes may look small at first, but they add up over time. Don’t forget to congratulate yourself for these accomplishments (just don’t spend too much on the champagne).
Get an Accountability Buddy
Talking about money can feel weird and stressful, but it’s a great way to help yourself stay on-track. If you have a friend, a partner, or a money guru you can rely on to help you say no to extra spending, celebrate financial wins, and stay encouraged, bring them into the fold! Some people post about their budgeting journey online. Consider following along, or even sharing your own wins and struggles on social media. Or, just keep talking about it with someone you trust.
You Got This!
Following any formula to reduce debt and stay within your budget will help keep your finances in check, but it always starts with examining what you have and what you owe. Get excited and take control of your future! If you need advice, tools for success, or someone to help celebrate your wins, come talk to your friends here at Sierra. We’re excited to see your budget take off!