- Budgeting, Debt, Financial Advice, Savings
- April 16, 2021
- FCU Team
The National Endowment for Financial Education discovered that almost 90% of Americans have struggled with financial stress because of COVID-19. While 2021 is already well underway, we must continue to work around the conditions of the pandemic and that means preparing a budget is more important than ever.Helpful Budgeting Strategies
A zero-based budget means that you create a budget for every dollar you make. Start by creating categories for your required expenses, such as bills, food, insurance, transportation, health expenses, loan payments and savings. After creating your categories and determining how much you spend on each per month, you can set aside any leftover amounts into recreation, eating out, or entertainment.
You can keep track of your zero-based budget in a few different ways. You may keep track of your expenses and income by hand, in a notebook or a spreadsheet. You can also utilize a budgeting app like Mint, which does a lot of the work for you. Budgeting apps can automatically sort your debit and credit card purchases into budget categories as you spend.
The zero-based budgeting method is great for beginners. It can take a little while to set up, but once you choose your tracking method, it gets easier and easier to keep track of your spending each month. See a very basic visual representation below. You'll see that every dollar earned finds a place!
Another popular budgeting method is the 50/30/20 method. This method helps you budget by splitting your finances into three main categories:
- 50% of your monthly income is reserved for essential expenses (bills, food, rent, insurance, debt payments, etc.)
- 30% of your income can be used for personal expenses such as shopping, ordering take-out and personal care
- 20% of your income goes into savings
This method allows for some flexibility in your budget as you move funds to different expense categories as needed. You can adjust your essential and personal expense percentages; however, you should never allow your expenses to exceed 80% of your income. In other words, you must always set aside a minimum 20% of your income for savings every month.
The 50/30/20 method can be helpful for those who may not have consistent income month to month and need to be able to adjust their budgets accordingly.
The envelope method is a form of zero-based budgeting, however instead of using your credit or debit card for purchases, the envelope method is a cash-based system. You sort cash into envelopes for each of your expense categories, such as groceries, shopping, bills, gas, etc.
Confining yourself to spending only the cash you have saves you money, as it can be tempting to swipe your card even if you know you’re already over-budget. It also allows you to physically see how much you have left to spend.
This budgeting method can be great for teenagers, those who are trying to pay down debt, or anyone who needs a hard limit on spending. It protects you from racking up your credit card balance or over drafting your bank account.
Rather than focusing on numbers, the value-based method allows you to prioritize your own spending based on your preferences.
Start by making a list of the values that are most important to you, ranked by most important to least important. Be sure to include all your essential expenses. Then, assign how much you need (or want) to spend in each category for one month. Once you get to the end of your monthly income, see how far down your list you are. You may find you can’t afford to spend in every category. If that is the case, you may need to either reassign spending in the categories higher on your list or readjust your priorities.
This budgeting method can be useful if you want more control over where your money is spent instead of being told what you’re supposed to spend on. With this method you can specifically set aside money for things that really matter to you, like date nights with your partner, massages or beauty treatments if it means a lot to you.
If you'd like to build a values-based budget, this video is a great place to start!
Financial Tips for the Rest of the Year
Budgeting your money is integral in recovering from financial hardship in 2020. However, there's enough time left in 2021 to not only improve your financial situation from last year, but to build wealth, diversify your income, and become financially independent.
Tip #1 – Establish Your Financial Goals
To get serious about growing savings, you need to evaluate your current financial situation. You can use these questions to start your financial assessment:
- Am I overspending on unnecessary products and services, like streaming services and memberships?
- What debts do I have, and what is most important to pay off first? What has the highest interest rate and balance? How much should I pay on each of these debts per month?
- Do I have an emergency fund set up? How much do I need to deposit monthly to save up 3 months of take-home pay?
- Are there ways I can increase my income? Can I ask for a pay raise or turn one of my hobbies into a side business? Should I start investing?
After evaluating your current situation, set some goals for yourself. What is your #1 priority this year? To become debt free? To save three months of pay for an emergency fund?
Make your action plan and budget accordingly. Prioritize paying off debt and creating an emergency fund before you plan that fun vacation. Don’t forget, growing wealth and becoming financially stable doesn’t necessarily mean cutting costs. Consider ways in which you can increase your income, too.
Tip #2 – Save First
This may be difficult for those who have an extremely tight budget or are trying to pay down debt. However, saving first is the idea that you should set money aside in your savings account before paying any of your bills, paying debts, or buying new clothes. If you think about it, if the very first thing you do after you get paid is spend it on going out, or even on your bills, and only save what’s left over at the end of the month, you’re not actually getting first priority over your income. If you put aside money into your savings first, you will find it is much easier to grow your emergency fund or start a savings mindset.
If you have a tight budget, adjust how much you save accordingly. Even if you only save $20-$30 a month, you are still prioritizing yourself and your financial wellness, which can help build confidence and a healthy relationship with money. Setting up an automatic transfer to your savings account also helps automate the process so you don’t even have to think about putting funds aside.
Tip #3 – Create an Emergency Savings Fund
Most financial planners say that you should have at least 3 months of income in an emergency savings account in the event of losing a job unexpectedly, an expensive car repair, or a health emergency. Once you save between 3-6 months of your pay saved for emergencies, you can begin setting aside money for retirement, buying a new home, or saving for a vacation. If you want to follow the “save first” principle, get started by setting an auto-transfer to deposit money into an emergency fund right after your paycheck hits your account.
Tip #4 – Pay Off Debt Each Month
If you want to pay off debt, be sure to try prioritizing your debt and loan payments in your monthly budget. You should attempt to pay your entire credit card balance on or before the due date every month. However, if you have more debt than you can pay off at once, you should be pay as much of the balance as you can each month.
Tip #5 – Save For Retirement
After you’ve created your emergency fund and paid down some of your debt, you may want to consider setting aside money for retirement. If your employer offers a 401(k) plan, do some research on the benefits offered and start depositing money into it as regularly as possible. If not, you can open a retirement fund such as an IRA for yourself and deposit money monthly, quarterly, or even annually.
2021 could still pose some potential financial hardships as we continue to adapt to shifting economic conditions tied to the pandemic. It is important to remember to be flexible with your budget and review the numbers and your progress monthly. Make adjustments as needed throughout the coming year to prepare for the unexpected and maximize your monthly income.
For more help with preparing your finances for the future, contact us today, or check out our own budgeting video in the links below.
You May Also Like:
- Guide to Budgeting — Florida Credit Union
- Financial Tips for College Students: Budgeting & Paying for College
- Eating Your Dollars Away: Budgeting for Foodies
Florida Credit Union is a full-service financial institution. Founded in 1954 as the Alachua County Teachers’ Credit Union, FCU now services over 120,000 members in 45 counties throughout North and Central Florida. For more information on the services we provide, visit FLCU.org or call us at 1-800-284-1144.