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How to Make a Budget and Pay Your Debts

Managing Your Money


What It Means to Budget

If you’re not already invested in a personal budget, or prefer not to keep track of your finances, budgeting probably has a negative connotation. It sounds like you won’t be able to eat at your favorite restaurants when you want to, or you’ll have to cancel a subscription to your Hulu account (even though you’re paying for three other streaming services already).

But you’re here now, so you understand that at some point you have to get a handle on your money. It’s the right move, and fortunately not as difficult as it may seem! With a little bit of structure and forethought, budgeting is a snap. We’ll walk you through all the steps, and soon you won’t just be saving money – you’ll be in complete control of your finances. 

Our Philosophy

If your debts are deep, or you rely on government aid to make ends meet, budgeting should be your main concern every single day. Often times we like to ignore the fact that the world runs on money. 

The truth is this: if you don’t accept how the system works; if you’re not figuring out and actively working on ending your financial burdens, you’ll never get out from under the rock. Money will always be your main concern, and you won’t be able to truly enjoy what life has to offer.

Approaches to Budgeting

It should be as simple as paying your bills and saving the leftover money, right? Sort of… The most effective budgeting method differs depending on who you ask. Since you’re asking us, we’ll clue you in on what we believe is the most successful strategy to abide by.

Two Factors

There are two key factors that will gauge your success with budgeting, even more so than the type of budget you choose: 

  1. Are you emotionally prepared to take control of your finances? 
  2. Does your chosen strategy work for your lifestyle?

Conquer Your Emotions

When you make a significant change to your daily routine, there’s going to be some form of emotional adjustment. Perhaps it’s depressing that you’re indoors more since you can’t afford to eat out. On the contrary, maybe it’s uplifting because you feel like you’re back in control. 

In our experience, it’s going to be a negative emotion – at first. You’re more confined, more restricted in options. Keep reminding yourself during the difficult times that your financial hardship is temporary, and it’s going to be a great feeling to rid yourself of debt! We promise that when you start to see the light at the end of the tunnel, a feeling of success and accomplishment will take over.

Accommodate Your Lifestyle

The second key factor you must consider is whether the budgeting strategy you have chosen works for your lifestyle. A strategy that sounds most effective might be too draconian, and leave no room for you to enjoy anything in life. If you’re too strict with yourself, there’s the possibility of getting off-track. 

Think about how budgeting is similar to a diet. When most people diet for too long without any cheat days, they eventually break down and start to binge. All their weight loss and progress is gone in a matter of days. The same thing can happen when you budget too hard. You’ll feel stifled, and like you deserve to spend more than you can afford. 

On the same token, don’t be too easy on yourself! If you don’t take the budget seriously, or frequently spend outside your limits, you won’t make any progress. It can be just as bad, if not worse, than budgeting too hard. 

Effective Budgeting Strategies

We’ll kick this off by explaining the difference between needs and wants

Needs are services or payments that aren’t optional. Examples include your electrical bill, auto insurance, gas for your car, groceries, etc… they are things that would make your life hell without them. 

Wants are optional. Things like restaurant dinners, going to the movies, or a gym membership are optional. You may feel like you simply can’t live without your subscription to Hulu, but lets assume that hot water for your shower is more important. 

Now we’ll list the most popular budgeting methods, and how they work…

50/30/20 Budget

You may have heard of this one before. It’s the most common and widely known budgeting strategy because it’s pretty easy to follow. Basically, the 50/30/20 budget means 50% of your after-tax income goes towards your needs, 30% towards your wants, and the remaining 20% goes to either your savings or your debt payments

Since it only has 3 categories to allocate for spending, it’s a good pick for people who don’t like the idea of micro-managing their budget, but still want a decent sense of structure. 

60% Solution

This kind of budget is more laid back when it comes to the math. Instead of contributing different amounts to needs, wants, and savings/debt, you’ll contribute 60% for all of your needs and some of your wants. Not all of your wants, just some of them – which are limited to commitments you deem necessary. They can be things like tutoring for your children, or paying for a gym membership. They’re not 100% necessary, but enrich your life enough to be worth the cost. 

When you’re trying to pay off debt, consider paying a good portion of the remaining 40% towards it so you can avoid interest charges, and get back to saving quicker. 

If you’re not in debt and just looking for good money management tactics, consider dividing it up how the creator of this budget does: 10% to a retirement fund of any kind, 10% to a long-term savings goal, 10% to a short-term savings goal, and 10% for recreation. 

The 60% Solution is a good choice for people who don’t want as much structure as a 50/30/20, but still want a percentage goal to aim for each month. If you like the 60% idea but think it’s not structured enough, divide up the remaining 40% into spending categories that work for you.

Reverse Budgeting Method

A Reverse Budget is unique from the others we’ve spoken about so far. There are no percentages to deal with, only priorities.

The first priority is adding to your savings and investments. The second is your “needs”, including your debt payments if any. Lastly, your wants. This method is particularly useful if you don’t like the idea of doing any math, have no debts, or you already have no problems paying your bills. It was designed to help minimize overspending on “wants”.

Since your financial goals and obligations have already been met by the time you’re paying for your wants, it’s impossible to overspend…. unless you have a shopping addiction and a credit card, but that’s an entirely different article.  

Zero-Based Budget

No percentages for this one either, but it requires the most math. Getting the Zero-Based budget is incredibly rewarding when you get it right. Your goal for every month is for your after-tax income minus your expenses to equal 0. That doesn’t mean you should spend all of your money on “wants” if you have some leftover. It means you should have a plan for that leftover money, so when you add it to the expense category and subtract it from your income, you still reach that 0.

Adding up your sources of income and sources of expense are going to be your biggest hurdle. Especially if they change on a month-to-month basis. When summer is coming up, expect to pay more in electricity to run the AC, and reflect it in your expenses when you make a new budget. You will have to recreate the budget every month for it to be effective!

The Zero-Based method is an excellent strategy for people who are extremely particular about where their money is being spent, and how it can be used most effectively. For most people, though, it can seem daunting unless money is your hobby. 

We wouldn’t recommend this kind of budget for younger people, or those starting off with terrible money habits. Instead, try starting with a simpler budget type. There’s more room for error with the 60% Solution, or a Reverse Budget. You’ll acclimate yourself to managing money, and be more comfortable with the idea of delayed gratification. 

Staying on Track

After you’ve selected the budget that you think will work best for you, the hard part begins. If your budget requires some math, get started on that first. Figure out what you’re going to be spending and saving. If you’re technologically inclined, it can be useful to track your money in a spreadsheet. Make your own, or find template samples online that can be tailored to fit your needs. 

It’s a good idea to keep a mental log of the emotional changes brought upon you by your budget. After a few months, ask yourself some serious questions. Do you feel like you’re making progress? How has your personal life been impacted by your new spending habits? Are you content with your current program, or too stressed out?

When you’re stressed out, adhering to a budget can be impossible. Make small adjustments. Move the percentages around. Find out what works for you so you can continue to make progress. Just make sure you don’t sacrifice your priorities to justify an unnecessary spending spree that could have been avoided if you had monitored yourself more closely.

Emergency Fund

Having an emergency fund is critical to staying on track with your budget. Why? Because if you’re slapped with an unexpected expense, such as your car breaking down, you might not be able to afford groceries. Then you’ll have to purchase the groceries on credit, and now your debt has increased because you weren’t prepared. This whole scenario can be avoided by preparing yourself.

Think about what your worst case financial scenario would be, for a single event, that could happen at any time. That is what you want to be saving for. 

If the worst thing that could happen to you financially is having to pay a $7,500 Emergency Room deductible, save for that. Or get a better health insurance plan. If your truck has shown an engine misfire code for 3 months and you haven’t gotten it checked out, start saving for an engine replacement.

You want to be thinking about the worst. case. scenario. It’s not overkill, because when you’re prepared for a whirlwind of financial trouble, you can’t be stopped. It’ll hurt to pay out that emergency fund, but your budget and quality of life will be safe. If your emergency fund has evaporated, start replacing it as soon as possible. Misfortune has a habit of coming in waves. 

Update Your Budget Often

If you chose any budget other than the Zero-Based Budget, updating your budget on a month-to-month basis isn’t required. It is helpful, though. Receiving a pay increase at work, or paying off one of your debts changes the game up. Be on the lookout for opportunities to commit more money to your debts, and then your savings. The quicker your debts are paid off, the quicker you’ll be content with your financial life. 

Complementing Your Budget

No not complimenting – complementing your budget. Figuring out ways to improve upon the system that already works for you.

There are countless ways to make improvements, but here are some of the big ones:

  • Switch to cash and checks only. If you’re someone who can’t keep track of their spending and pays for everything on a debit/credit card, the issue might be in how you’re paying. When you switch to cash and checks, handing over the bills or writing the dollar amount on a check will help you decide if something is truly worth paying for. 
  • Close unnecessary credit accounts, or hide your credit cards until you’re out of debt. 
  • Re-shop your insurance. This is an often overlooked piece of the puzzle. If your Auto and Renters Insurance aren’t bundled with the same company, or your monthly premium hasn’t been quoted in years, reach out to your agent. Even better, speak with a broker to get the best deal from dozens of insurance carriers at the same time. Check out our main site for more info:
  • Downsize. Could your rental be cheaper? Is your car a gas guzzler? Are you eating too much from stress? Think about where your money is going, and where it can be minimized. 
  • Reward yourself. Don’t take this piece of advice and run with it! Only consider rewarding yourself if you have been successfully budgeting for a long time, and know that a small expense isn’t going to destroy your plan. Perhaps a moderately priced cheat meal at your favorite restaurant dinner could kill two birds with one stone. Stay on track with your budget, and your diet!

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Frequently Asked Questions

I don’t have a fixed income. How can I create a budget if I don’t know what I’m going to be paid?

Complicated question with a very simple answer. What is the least amount you have ever been paid in a month at your current job? Find that number, and build your budget around it. If you were paid more than you budgeted for, that’s great news! Contribute the extra earnings to your debt, savings, or a well-earned (but not extravagant) reward. 
If your job is 100% commission based, this can be a little trickier. You might be a commercial real estate agent, and make all of your money for the year in one month. You’re going to have to do some amount of estimation, or a budget just isn’t possible. 
Make sure you have an emergency fund when you’re not on a fixed income!

Which of my debts should be paid off first?

Financial experts will digress when reading this: pay off the debts that bring you the most emotional stress. Even if your other debts have a higher interest rating than the one you stress about most, just pay the one you stress about most. 
The philosophy is consistency above everything else. It’s easy to claim that the most articulate budget is your best option, because it’s just math! But if the stress from managing your finances to the extreme causes you to impulsively spend money, it really wasn’t your best option. 

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