We’re nearing the end of the year, so it’s a great time to see how you did with last year’s budget and plan for the new year. If you didn’t have time to create a budget last year, you should try to make this one of your goals for 2022. So, here are two top budgeting methods to help you save more.
You Need a Budget
You’ve heard this many times, but it’s worth repeating. The budgeting process helps you get a complete financial picture of how much money comes in and goes out. Empowered with this information, you’ll be able to manage your cash flow so that you have the funds to pay for your life goals, such as getting rid of debt and saving for emergencies and retirement.
Plus, your budget serves as a financial roadmap to help you save more money so you can do the other things you want to do in life, such as travel, buy a home or start a business.
The only way to be sure your budget accurately reflects your financial life is to organize all information and pieces of paper related to your income and expenses. Gather together electronic or paper records, such as,
- Bank statements
- Pay stubs
- Bill payments (monthly and loans)
- Cash receipts (out-of-pocket expenditures)
- Credit card receipts
- Tax return
- Any other documents of income or expenses
Create or Download a Budget Worksheet
You can create your budget with a simple excel spreadsheet, Google sheets, or even manually. But, digital apps such as Mint not only help you get your budget set up but is there to guide you forward toward your savings and debt reduction goals. And it’s free. You Need a Budget (YNAB) is another highly rated budgeting app, costing around $84 per year. However, it comes with a few more tools to help you set financial goals and track your money habits.
Identify Your Total Income and Total Expenses
Once you have gathered all the information and entered it into a spreadsheet or budget app, you’ll have a clear picture of your total income and expenses. If your costs exceed your total income, you know your first task is to look for ways to reduce your expenses or increase your income.
How To Use Your Budget to Save More Money
There are several budgeting methods to help you save more money.
The 50/30/20 Rule
One of the most popular budgeting methods to help you save more money is the 50/30/20 rule. With this budgeting method, you designate no more than 50% of your net income on necessary expenses, including:
- Minimum loan payments
- Car payments
- Child care or other costs related to work
Then, from the balance, you commit to spending no more than 30% on lifestyle expenses, such as entertainment, travel, gifts, and 20% is dedicated to debt reduction and savings.
The 60% Rule
Another budgeting method is the 60% rule which works like this: You commit 60% of your gross income to essential expenses, including:
- Recurring bills (credit cards, loans, car payments)
- Groceries and clothing
- Insurance premiums
- Household expenses
The remaining 40% of your money is divided as follows:
- 10% to emergency savings
- 10% to retirement savings
- 10% for long-term goals, such as buying a home, higher education, or starting a business
- 10% for non-essentials, such as entertainment and travel.
These budgeting methods can only help you save money if your income is more than your expenses. However, if your costs exceed your income, you need a plan to improve your cash flow. Loan consolidation and balance transfer cards, for instance, can reduce your interest payments, giving you more money to fuel your budget goals. Tracking your money and being careful about wasteful spending also helps improve your monthly cash flow.