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The Difference Between Wants and Needs

When you’re creating a monthly budget, one of the most important steps you need to take is categorizing your spending by whether it is a “need” or a “want.”

It is also one of the most difficult steps because what is a need versus a want can vary from person to person. It is also easy to miscategorize wants as needs if you are so accustomed to them that you have trouble imagining living without them.

Learn how to budget more successfully by separating your expenses into needs and wants.

What Are Wants vs. Needs?

When you fill out a budgeting worksheet, you categorize your spending as either wants or needs. This separates your expenses into what is absolutely necessary for your well-being and survival (needs) compared to what you would like to have but do not require (needs).

You may also see needs referred to as “mandatory” or “fixed” expenses and wants as “discretionary” or “variable” expenses.

Needs are usually your basic living expenses, things necessary for your health, or expenses that are required for you to do your job. These could be:

  • Rent or mortgage
  • Utility bills
  • Healthcare and/or therapy
  • Medication
  • Food
  • Work uniform
  • Commuting

Wants are things you choose to buy but could live without, such as:

  • Entertainment
  • Dining out
  • Home purchases
  • Travel
  • Electronics
  • Monthly subscriptions or memberships
  • TV or music streaming accounts
  • New clothing

Wants are not inherently bad. They are pleasant, and oftentimes can help you accomplish important goals like keeping in touch with loved ones, having fun, or staying healthy. But they are not necessary to your survival or well-being.

“Needs” That Are Really “Wants”

The line between wants and needs is sometimes blurry, and it can be hard to separate out which expenses belong in which category. There can be different reasons for this.

Lifestyle

Whether an expense is a need or a want often depends on how and why you use it. Home internet may be a need for you if you work from home. However, if you only use your home internet for entertainment, such as browsing social media or playing video games, it is actually a want.

Split Expenses

Parts of an expense may be categorized as a need while others are a want. A grocery bill is a need because you need to eat. But if, along with your produce, protein, and whole grains, you also buy chips and soda, then some of those things are wants, rather than needs.

Which Option You Choose

Other times, the category of expense is a need, but the specific option you choose within that category is a want. For example, having some kind of phone may be a need so that you can communicate with family or coworkers, order your medication, or contact your landlord.

All those things, however, can be accomplished with a $20 flip phone. If you choose instead to spend hundreds of dollars on a new smartphone, that extra expense is suddenly a want.

Choosing that option that is a want rather than a need is not always bad. For example, purchasing organic food may be an ethical choice that is worth the money for you.

But it is a choice. Understanding which expenses are and are not optional will help you more effectively create a household budget.

Is Saving a Need or a Want?

If your budget is tight, it can be easy to stop putting money towards savings or long-term financial goals such as:

  • Emergency savings
  • Paying off debt
  • Retirement funds
  • Life insurance
  • Disability insurance

This sort of spending feels like a want because it is not an immediate need. You can survive this month even if you don’t put away money for retirement or build an emergency fund.

However, saving and getting out of debt should also be considered needs because they are investments in your long-term financial and personal well-being.

Having life insurance, for example, might not be something you need this month. But if you should pass away unexpectedly, it will certainly be a need for your family when it is time for them to pay for your funeral or provide for your children.

Because of this, saving and getting out of debt should be considered a need. Whether you are saving $10 a month or $10,000, planning for your long-term well-being should be taken care of along with other mandatory expenses.

Some financial experts recommend that saving and paying off debt should be prioritized even before expenses like rent and food in order to motivate yourself to accomplish them. This is known as “paying yourself first.”

The 50/30/20 Budgeting Rule

If you use the 50/30/20 budget system, your expenses will break down to:

  • 50% of your after-tax income spent on needs
  • 30% spend on wants
  • 20% spent on savings and debt reduction1

This division of expenses means there’s nothing wrong with buying fancy bread and milk or subscribing to Netflix. The 50-30-20 budgeting rule of thumb allows you to spend 30% of your take-home pay on things you want.

By assigning a concrete value to your wants, however, you prevent yourself from overspending and ending up in debt.

The key to budgeting is to become more aware of how you are spending money. This allows you not only to spend within your means but also to make sure that your spending aligns with your values and priorities.

Adjusting Your Spending on Wants

When you need to cut your spending to save money, eliminating wants is often the easiest and first place to make changes. For example, you may give up your gym membership and start running around the neighborhood for exercise.

However, just because something is a need does not mean its cost is set in stone.

For example, if you are paying $1700 a month in rent, you can save significant money by:

  • Moving to a smaller apartment
  • Getting a roommate
  • Temporarily moving in with family

You might need to get to work every day, but instead of spending money on parking and gas, you could save money by:

  • Walking
  • Taking public transit
  • Carpooling with a coworker or neighbor
  • Biking

Needs often make up the biggest portion of your budget, especially if you are following the 50/30/20 rule. By rethinking how your needs look, you can often make the biggest change in your monthly spending.

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How to Track Your Expenses

Tracking your expenses is one of the key factors in making your budget work for you. If you do not know how much you have spent each month, you cannot tell when you have overspent. Even the small expenses can cause you to blow your budget. There are several options available to you track your expenses. One of the simplest is a written ledger or tracking system. It may be even easier to choose budgeting software that works with an app to track expenses on your phone. It will allow you to keep up while on the go. It’s also important to know how to track your expenses in a notebook. It can also help you become more aware of what you are spending and where you are spending it. It can help you identify the areas where you need to change.

Create a Ledger

First, you will need to have your budget with you. You should also have a notebook available to you. You can divide your paper into about three columns a piece. You will need to write down each budget category at the top of the column. Then you need to record the assigned amount next to it. If you have not created a budget, and are tracking your expenses so that you can create one, then you should decide on basic spending categories such as utilities, food, rent, eating out, fun money, and insurance. Record each of these at the top of the paper.

Record Your Expenses Throughout the Day

Next, you will need to take time each day to record your expenses. As you record each expense in a category, you will need to keep a running total of how much you have left in that category. Simply subtract the amount you spent from the current total and record the answer. It may be helpful to have two separate columns, one for expenses and one for the current total. You may also want to record the total in another color. If you are tracking expenses to determine how much you spend you will need to add the amount you spent to your running total. If you are married, it helps to sit down and review how much was spent each day. It is especially important if you are just starting to budget. It can help you encourage each other as you change your spending habits

Stick to Your Spending Limits

You will need to stop spending when you see that you are out of money. It is the essential step in staying on budget. You may find that your budget is unrealistic or you may need to transfer money between categories. Take the time towards the end of the month to adjust next month’s budget so that will work for you. It is important to remember that saving and debt payments should take precedence over eating out and vacations. You will need to cut back in some areas, but you should still be able to eat every day.

Choose What to Do With the Money You Did Not Use

At the end of the month, you have the option of rolling the money over into the next month’s category or transferring the money to a savings account. For bills that vary like your power bill, you may want to roll the balance forward to help even out the cost of the utilities each month. For things like groceries, you may want to transfer it to savings so that you can build up your emergency fund or work toward other goals. 

Tips:

  1. Another option is to use budgeting software or a budgeting system to track your expenses. It can save you time, and it makes it easier to manage your budget each month. There are a wide variety of options you can use to manage your finances, and it is important to find the right budgeting software for you. Ideally, you want to find something that will work across platforms and sync with your bank. If you are married, you want something that allows both of you to enter expenses on the go to make tracking your spending much easier.
  2. Another option is to switch to cash only for categories where you do a lot of spending each month. For example, groceries, eating out, and entertainment categories. You will set up an envelope for each category and put the amount you budgeted in it at the beginning of the month. When you go shopping for those categories, you will take the envelope with you. You can keep the receipts in the envelope so you can check at the end of the month to see how much you spent. 
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Understanding Budgeting & Personal Finance

Budgeting is the personal finance tool for taking control of your money.

A budget is a written plan for how you will spend your money. It allows you to make financial decisions ahead of time, which makes it easier to cover all your expenses along with paying off debt, saving for the future, and being able to afford fun expenses. Budgeting consistently can help you turn your finances around and begin to build wealth.

Why Budgeting Is Important in Personal Finance

A budget a powerful tool because it allows you to determine how and where you want to spend your money.

When you master budgeting, you make sure that every dollar is being used how you want it. You can track your spending and determine whether it matches your priorities.

Often when people start budgeting they are surprised to see how much money is going to things that are not important to them, like eating out, mindless online shopping, or high-interest payments on credit cards.

Budgeting allows you to monitor your progress on financial goals and stick to your financial plan. Eventually, it creates opportunities to eliminate debt and build wealth.

Create a Budget in Nine Steps

To create a budget, you have to start by creating a picture of your financial situation. It helps to have a list of the bills that you must pay each month, as well as your paystubs and either bank records or receipts for the past three months.

Step 1: Determine your income

Begin by listing your monthly income. This should include any paychecks you receive, as well as income from other sources like:

  • Child support
  • Government benefits
  • Social Security
  • Investments1

If you have a business, you should include the amount that you pay yourself each month rather than the business’s total income. If you do not get paid monthly, look at how much income you had last year and divide it by 12 to determine your likely monthly income this year.2

Step 2: List categories of mandatory expenses

Mandatory expenses are the expenses that you must pay every month and are vital to your housing, work, or legal obligations. These should include things like:

  • Rent
  • Electricity
  • Water
  • Heat
  • Internet
  • Food
  • Health insurance
  • Prescriptions you take daily or monthly
  • Childcare
  • Transportation to and from work
  • Child support
  • Alimony3

You can usually identify mandatory expenses because they are fixed amounts, though some, like electricity or water, can vary month to month. If you have debt payments, such as student loans or credit card payments, they should also be included. Don’t worry about assigning values yet; simply make a list of the categories.

Step 3: List categories of discretionary expenses

Next, identify your discretionary expenses. These are things you can go without but often choose to spend money on. They are wants, rather than needs. They may include:

  • Fitness memberships
  • Clothing
  • Cable TV
  • Streaming subscriptions
  • Eating out, entertainment
  • Leisure travel
  • Personal grooming
  • House cleaning
  • Home decor

You can also include savings goals, such as retirement accounts or a down payment fund, as discretionary expenses for now. There will not be immediate consequences if you scale back on these for a little while, though there may be long-term consequences if you ignore them for an extended period of time. Once your budget is under control, you can move these to mandatory expenses with fixed monthly contributions.

Step 4: Estimate expenses

Once you have all your spending categories listed, it’s time to assign monetary values to them. Without looking at your spending patterns, write down what you think you must or will spend in each category in a month.

Step 5: Compare estimated to actual expenses

Now, go back through your spending history for the last three months and determine what you actually spent in each category per month. You can use your receipts or bank statements to determine what you actually spent. Compare these to the numbers you estimated.

If there is a big difference between the two, that is a strong indicator that you need a strict budget to manage your spending and keep track of your finances.

Step 6: Assign spending limits within your income

Once you have a sense of how much you are spending per month compared to what you think you spend, it’s time to set spending limits. Start by budgeting for mandatory expenses, then add up these values and subtract them from your income.

The amount you have left is what you can budget for discretionary expenses and savings goals.1 What you budget for expenses should not be more than your income, otherwise, you will end up in debt.

If you have debt payments, start by budgeting for the minimum payment, then add more if you have available funds leftover. If you have additional money after you plan your budget, you can add it to the categories for your financial goals like saving for retirement or building an emergency fund. After that, you can budget more for discretionary expenses and luxuries.

Step 7: Look for places to cut expenses

If you have more expenses than income, you will need to find ways to cut back on your expenses. Start by lowering the spending limits in the discretionary section of your budget or eliminating them entirely.

Next, look for places where you can reduce your mandatory expenses, such as:

  • A cheaper monthly insurance premium
  • Using less electricity at home
  • Taking the bus to work instead of driving
  • Spending less on groceries

If your expenses are still more than your income, you may need to increase the amount you earn by adding a second job or taking on gig work.

Step 8: Track your spending

Once you have your budget set for the month, you will need to track your spending and stop when you have reached the limit in each category. When you stop spending, that’s called sticking to your budget.

If you end up spending more in one category than you had planned, you can transfer money into that category to cover it from another category. For example, if you budgeted $400 for food for one month and you ended up spending $450, then you can move $50 from another category to cover it. In order to do this, you will need to check your spending before making purchases to see how much you have left.

Step 9: Plan for the next month

After you have completed your first month of budgeting, it will be easier to plan for the next month. Look at how you spent and make adjustments for categories in which you spent more than you planned and cut back on the categories that had additional funds in them.4

You should also look ahead to large expenses coming up, such as insurance premiums that are only due every few months or upcoming holiday expenses. Plan for these larger expenses as you set your budget for the next month.

Four Budgeting Strategies

Every person is different, and one strategy may work better for you than another. If you are brand new to budgeting, try out different options to find the one that works best for your spending habits and financial mindset.

Envelope Budget

How it works: In an envelope budget, you assign money to each category and deal with cash for as many categories as possible. At the beginning of each month, take the appropriate amount of cash out of your bank account and put it in a designated, physical envelope labeled with the name of each category. When you run out of money in that category, you either stop spending, or you have to take cash from the envelope for a different category to cover the difference.

Good for: People who are not good at tracking expenses or who need to stop using their debit/credit cards.

If you want to pay bills online or transfer money into a savings account, set those to pay at the very beginning of the month, then take cash out for the remaining expenses after those bills have been gone through.

50/30/20 Budget 

How it works: The 50/30/20 budget breaks down how much you should be spending on different categories. Fifty percent of your after-tax income is to be spent on your mandatory expenses, or needs. Thirty percent of your income should be spent on discretionary expenses, or wants. Twenty percent should be spent on savings and debt repayment.5

Good for: People who want to focus on financial goals.

Make sure to separate savings and debt repayment from other expenses, rather than including them in either living expenses or discretionary spending.

Zero Dollar Budget

How to works: A zero-dollar budget involves planning how you are going to spend your income down to the last penny. Every dollar of income you make for the month should be assigned to a spending category. This allows you to know where all of your money is going at any given time. It also makes it more important to monitor your budget regularly.

Good for: People who need to get control of spending.

Be sure to include a category for surprise expenses. If you have any extra income to budget at the beginning of the month, it can go into this category, then roll over into the next month if you don’t spend it. This will allow you to build up a short-term emergency fund.

5-Category Budget

How it works: The 5-Category budget sets up five basic categories and determines the percentage that you should spend on each. For housing, you can spend up to 35% of your income. Living expenses, which include mandatory expenses such as groceries and your cell phone as well as discretionary spending, should make up 25% of your spending. Allocate 15% each for transportation and debt payoff. Finally, set aside 10% of your income for savings.

Good for: People who have some wiggle room in their finances but may have small amounts of debt.

Housing expenses include your mortgage payment or rent, as well as household utilities, home maintenance, HOA fees, and homeowner’s or renter’s insurance.

How to Make Budgeting Easier

It takes a lot of work to track your expenses, and for many people, budgeting can feel restrictive. If you share finances with another person, disagreements overspending can cause resentment or fighting.

The first two or three months of budgeting are the hardest as you adjust categories and work on cutting your spending. Luckily, there are ways to make budgeting easier.

  • Use a budgeting app: Tools like You Need a Budget (YNAB) or Mint will import your transactions for you and make it easier to assign categories, adjust the amounts, and track your spending. A single account can be shared between multiple people who need to track spending together.
  • Use cash: Consider switching to cash for some categories, even if you aren’t using an envelope budget. If you consistently overspend in a single category, such as eating out or groceries, take out cash at the beginning of the month for this category rather than using a debit or credit card.
  • Check on your budget each day: Set aside five minutes in the morning or evening to look at your spending and bank account. This can keep you from making a mistake or overdrawing your account.
  • Find ways to save: The more money you can save on your daily expenses, the easier it will be to stick to your budget. Look for ways to save on your groceries, lower your utilities, negotiate on bills, and more. Shopping around for the best deals can make budgeting less stressful.
  • Open an online bank account: If you don’t already have a bank account, open a checking account through an online bank. These often have lower minimum deposits and fees than accounts through brick-and-mortar banks. Once you have a bank account, you can set up online payments, create savings or retirement accounts, and more easily track where your money is going.
  • Make budgeting automatic: Schedule rent, loan repayment, or other mandatory expenses to be automatically paid on your payday. This will prevent you from accidentally spending that money on discretionary expenses. You can also schedule automatic transfers into your savings or retirement accounts. You can either do this automatically through your online bank accounts, by setting up different accounts where percentages of your paycheck can be deposited, or by using a budget app that can access your bank account.
  • Work towards a goal: Sticking to a budget can be difficult, especially if you aren’t used to regulating your spending. To motivate yourself, set a goal that you are saving toward: eliminating debt, building an emergency fund, getting to the point where you have more discretionary income, saving for travel, or any other goal that you are determined to meet. Working toward a set goal can keep you focused and remind you why sticking to a budget is worth it.

Why You Should Keep Budgeting

Once you have your finances under control, have eliminated debt, or have met other financial goals that you set, that doesn’t mean you should stop budgeting.

Sticking to a budget makes it less likely that you will accumulate debt or end up with large expenses that you have no way to meet. It also allows you to save money for fun expenses, such as travel, and eventually get to the point where you can build wealth through investing.

Even when you have plenty of money to meet your mandatory and discretionary expenses, budgeting is still an essential part of smart personal finance. Using a budget allows you to understand your financial situation and manage your money. It puts you in control, rather than allowing your money to control you.

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A Step-by-Step Guide to Getting Out of Debt

Debt will keep you from reaching your financial goals, like saving for retirement or buying a home. It can be a source of stress and grief, causing you to constantly worry about your finances and regret the limits debt has placed on your life.

Fortunately, debt isn’t a life sentence. You can (and should) make getting out of debt a priority. Follow these seven steps to take control of your finances and pay off your debt for good.

1. Understand the Type of Debt You Have

Getting out of debt—and staying out—requires that you change the habits or circumstances that led you to debt in the first place.

Understanding the type of debt you have, and how it happened, can help you create a plan for paying it off and make it less likely that you will fall back into debt in the future.

If you have debt that you don’t know how to manage, consider talking to a credit counselor. Credit counseling agencies are usually nonprofit organizations such as the Financial Counseling Association of America or the National Foundation for Credit Counseling. They are staffed with trained agents who can help you with:

  • Understanding your debt
  • Tracking your spending
  • Creating a budget
  • Developing a debt repayment plan1

Debt Due to Loans

Taking out loans happens naturally at certain stages of life. You may take out a loan to open a small business, buy a house with a mortgage, need an auto loan to purchase a new car, or take on student loans to fund your education.

These debts are not inherently bad, and they often come with manageable interest rates. However, they can create a strain on your finances when you are unable to make the required payments. They can eat up too much of your income, preventing you from covering your living expenses or saving money.

When that happens, you may find yourself taking on other debt, either in the form of credit card debt or personal loans, to make up the difference.

Debt Due to Circumstance

Sometimes debt accumulates due to circumstances outside your control. Many people have medical debt stemming from unexpected illnesses or injuries. You may have debt due to divorce. Or you may have become unemployed and had to take on credit card debt or take out personal loans or payday loans.

These debts can be crushing because they come with high interest rates. Often, you are forced to take them on when your financial circumstances were already strained. And as you attempt to pay them off, they can eat into your income and require you to take on more debt, creating a debt spiral that feels impossible to escape.

In many instances, such as when medical bills go to a collection agency, you may not even be aware that the debt exists until a collection agent calls you at home to report that you have unpaid bills.2

Debt Due to Spending

Thoughtless or reckless spending can create its own debt, usually in the form of high-interest credit card debt. Living beyond your means, such as taking out a mortgage your income cannot support or buying a car you cannot afford with an auto loan, can also create debt due to spending.

Once you accumulate debt due to overspending, you end up paying far more in interest and penalties than the actual value of what you purchased. This can tie up your income, requiring you to take on even more debt. Living beyond your means can even cause you to default on payments or end up declaring bankruptcy.

2. Take Control of Your Spending

Whether or not careless spending habits contributed to your situation, you will find it easier to start to pay off your debt if you keep close control of your spending and finances.

Take time to compare your monthly income with your expenses. Divide your spending into mandatory expenses, or needs, and discretionary expenses, or wants.

Mandatory expenses include things like:

  • Rent or mortgage payments
  • Utilities
  • Food
  • Transportation to/from work
  • Health insurance
  • Child support
  • Prescriptions
  • Childcare

Discretionary expenses include things like:

  • Cable TV
  • Gym memberships
  • Eating out
  • Clothing
  • Entertainment
  • Home decor
  • Personal grooming

In order to start paying off your debt, your monthly expenses will need to be significantly lower than your monthly income. You may be able to achieve this just by reducing your discretionary spending.

Pay your bills on time to save money. Late payments usually trigger fees or service charges that can make it harder to reduce your spending. Where possible, automate your payments to come from your checking account.

If that’s not enough, however, you may need to take further control of your spending by lowering your mandatory expenses as well. You can use tactics like:

  • Downsizing if you rent your home or negotiating your rent
  • Renting out a room or floor if you own your home
  • Choosing a cheaper cell phone plan
  • Splitting internet access with a neighbor
  • Choosing a less expensive health insurance plan
  • Looking for ways to cook cheaply, such as eliminating meat from your diet
  • Using public transit instead of your car

You can also look for ways to increase your income, even temporarily, such as:

  • Taking on a second job
  • Doing occasional gig work
  • Putting all your credit card rewards toward cash payments instead of points
  • Insisting that money you are owed, such as child support or alimony, be paid
  • Selling household items, jewelry, or clothing

Local pawnshops make it easy to sell your items for cash. However, you will likely make more money if you sell directly to other consumers through Craigslist, eBay, Etsy, or your local consignment shop.

Once you have reduced your spending as much as possible, create a budget. This will prevent you from accidentally overspending. You want to make sure your expenses stay below your income; otherwise, you will end up owing more money in the form of credit card interest or overdraft fees.

Reducing your spending as much as possible, and taking control of your finances with a budget, will allow you to put all almost your extra money toward paying off your debt.3

3. Figure Out How Much Debt You Have

If you have more that one type of debt, it can be easy to lose track of how much you owe and how much you are paying in interest every month. But you cannot begin to pay off your debt until you know what those values are.

Make a list of all your debts, how much you currently owe, and the interest rate being charged. Use recent billing statements, canceled checks or bank statements, and your credit report to get a complete list of everyone you owe and the amount you owe. Be sure to include the minimum payment required for each account. This is the smallest amount that you can afford to pay on your debt every month.

Including the interest rate associated with each account will show you not only how much you currently owe but also which debts are the most expensive. High-interest debts, like credit card debt or payday loans, can cost you many times the value of the loan itself because of the amount of interest that is added on every month.

4. Decide How Much You Can Afford to Pay

If you pay only the minimum every month, it can take years or even decades to finally pay off your debt. To eliminate your debt much faster, you’ll have to send more than the minimum payment to at least one of your accounts each month.

Use your monthly budget to decide how much you can spend on debt repayment each month. Subtract your expenses from your income, including any irregular or periodic expenses that may pop up during the month. What’s left over after you’ve covered all your necessary expenses is the amount you can spend on your debt. Use this amount in your debt plan.

If your income varies per month, base your amounts for your budget and debt repayment on the lowest income you expect to have. If you have extra some months, you can use that money for debt repayment. The more money you can put toward your debt, the faster you can have it paid off.

Remember, you need to make the minimum payment on each debt every month, so however much you have in your budget for debt repayment, you will first need to subtract every minimum repayment from that value. Whatever is leftover, you can put towards truly paying off your debt.

For Example

  • Your monthly income is $4000 and your monthly expenses are $3500.
  • $4000 – $3500 =$500 FOR TOTAL DEBT REPAYMENT
  • You have three debts with minimum payments of $50, $75, and $100 per month.
  • $500 – $50 – $75 – $100 =$275 FOR ACCELERATED DEBT REPAYMENT

5. Put Together a Plan

Decide in what order you are going to pay off your debt. You can decide to prioritize based on the interest rate, balance, or some other criteria that you choose. You can also use additional debt management strategies to reduce your monthly payments or consolidate your debt.

Whatever debt repayment strategy you choose, stick to your plan and send payments on time every month to avoid additional fees and interest charges. Eliminating your debt completely can take months or years depending on the amount of debt you have and the payments you make. Consistency with your payments is a necessary part of getting out of debt.

Debts that have gone into collection can do the most damage to your credit score, and repeated calls from collection agencies can damage your overall emotional well-being and stability. If you have debts that have gone to collection agencies, these are the ones you should repay first.

The Snowball Method

Using the Snowball Method, you pay off your debts from the smallest to the largest.

The “Snowball Method” is a term coined by Dave Ramsey. The name refers to the strategy of starting with something small and building it into something bigger, the way a snowball is made.

Make the minimum payment on every debt, then put any extra funds you have toward the debt with the smallest balance. This will be the one you can pay off most quickly, allowing you to see immediate progress on your debt repayment.

Once this debt is paid off, move onto the next smallest debt on your list, while continuing to make the minimum payment on everything else. You will have more money to put toward paying off this debt because you now have fewer minimum payments to make every month.

Continue until you have paid off all your debts.

Debt Stacking

This strategy focuses on prioritizing debt by interest rates.

The higher the interest rate, the more a debt will cost you over time. Eliminating the debt with the highest interest rate will allow you to save the most money in the long run.

Debt stacking is sometimes called the Avalanche Method to contrast it to the Snowball Method.

Make the minimum payment on every debt, then put any extra funds you have toward the debt with the highest interest rate. Once this debt is paid off, move onto the next highest interest rate, while continuing to make the minimum payment on everything else. As with the Snowball Method, you will be able to put more money toward paying off each subsequent debt because you have one fewer minimum payment to make every month.3

Student Loan Adjustments

If you have student loans, you may be able to have the amount you owe adjusted based on your income or financial situation, particularly if you have loans from the federal government. This can help you lower your monthly payments while you focus on paying off other debts or improving your financial situation.4

Once you have eliminated your other debts, you can start to make higher payments on your student loans.

Debt Consolidation

If you are having trouble managing too many debts, you can consolidate them into a single debt. This is a personal loan that covers the cost of your current debts, leaving you with only a single payment every month.

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What Is the 50/20/30 Budgeting Method?

The 50/20/30 budgeting method is a spending plan that has you set aside 50% of your take-home pay toward needs, 20% toward savings and debt repayment, and 30% toward wants. It makes monthly budgeting more flexible and sustainable since it focuses your spending on broad categories and avoids the need to budget for individual expenses each month.

If your spending priorities are out of balance, take the steps to adjust them by understanding how the 50/20/30 method works and how to put it to use to make monthly budgeting quicker, easier, and more efficient.

What Is the 50/20/30 Budgeting Method?

The budgeting method carves your take-home pay into three easy-to-remember categories at fixed percentages:1

  • 50% to needs:No more than half of your take-home pay should go toward needs, defined as any bills you have to pay to meet your financial obligations. This includes basic needs or necessities, such as rent or mortgage payments, transportation costs (car payment, insurance, gas money), utilities (electricity, water, and heat), and grocery bills.
  • 20% to savings and debt repayment:This percentage of your income is reserved for saving money, reducing debt, and reaching other financial goals. It includes funds you set aside to save for retirement, build an emergency fund, or pay off credit card debt.
  • 30% to wants:With the 50/20/30 budgeting method, you allocate the remaining 30% of your take-home pay toward discretionary spending, or wants. This category includes things like gym memberships, entertainment, and dining out.

Take advantage of the flexibility of the 50/20/30 budgeting method. While wants should be no more than 30% of your budget, you can reduce that percentage if you prefer to save more or don’t spend much on leisure. Likewise, if you’re a high earner, you may not need to spend all 50% on essentials and can assign more to either savings or wants.

How Do You Calculate Your Spending With the 50/20/30 Budgeting Method?

If it’s your first time budgeting with this method, start by assessing your monthly take-home or after-tax pay (also known as net income). If you have a variable income, use your average monthly net income (last year’s annual income divided by 12). Then, divide your take-home pay into needs, savings, and wants according to the recommended percentages set forth by the rule.

Let’s say you bring in $3,000 per month after tax. Multiply $3,000 by 0.50, 0.20, and 0.30 to calculate how much to spend on needs, savings and debt, and wants in a month, respectively.

Equate to calculate spending allocations with 50/20/30 budgeting method

How the 50/20/30 Budgeting Method Works

Once you’ve calculated your monthly spending allocation, implement the budget in a few steps:

  1. Set aside money for each category: Set aside the allotted amounts at the interval you choose—either once a month into each of the three categories or in piecemeal from each paycheck. If you prefer to set aside a percentage or dollar amount from each paycheck, divide the monthly percentage or calculated dollar allocation by the number of paychecks you receive each month to determine how much to set aside from each paycheck to each category. For example, if you bring home $3,000 each month and receive two paychecks per month, allocate 25% (50% divided by 2) or $750 ($1,500 by 2) of each paycheck toward needs, 10% or $300 toward saving, and 15% or $450 toward wants.
  2. Classify and track your expenses over the month: Using a spreadsheet or a budgeting app or software, accurately categorize and record your expenses (as needs, savings, and wants) as you incur them to avoid overspending or underspending in any category.
  3. Adjust your spending as needed: If you find that you’re spending too much or too little in a given category, make adjustments as needed to your spending to come in on budget by the end of the month. Likewise, if your spending priorities are out of balance, tweak them. For example, you may need to reduce your spending on needs if you want to save more aggressively for retirement or pay down a number of overwhelming debts. Over time, you should be able to better prioritize your spending on the expenses that matter most to you.

Don’t confuse needs with wants when you classify expenses. For example, the 50% should cover the cost of groceries (a need), but not eating out (a want).

Difference Between the 50/20/30 and Other Budgeting Methods

The 50/20/30 method provides a more flexible alternative to other common budgeting techniques, including the:

  • Zero-dollar budget: With this type of budget, your monthly take-home pay minus your monthly expenses equals zero since every dollar you earn has a specific purpose. You’ll divide your expenses into more categories (groceries, gasoline, and entertainment, for example) and subtract them from your take-home pay until there’s no money left. This method is a good option for those who need more structure in their spending, but it’s more rigid and requires more work than the 50/20/30 method since it requires budgeting for individual expenses.
  • Envelope budget: This budgeting method asks you to set aside cash for each spending category in labeled envelopes.2 The finite amount of money in the envelopes keeps you from overspending in a way that the 50/20/30 method can’t, but cash can be cumbersome and removes the option to pay certain bills by credit card. The 50/20/30 budgeting method gives you the option to make payments in any way you choose.

Limitations of the 50/20/30 Budgeting Method

As versatile as the budgeting method is, it has constraints:

  • Broad spending categories: The flexibility of the category definitions can work against you. If you misclassify wants as needs, you’re liable to overspend on luxuries by a considerable amount and run out of money for necessities.
  • Small savings allocation: The 20% allocation for savings and debt repayment may encourage you to save less than you need to meet your future financial goals. You may also make smaller payments toward debt, which can keep you in debt longer.
  • Separate system for expense tracking: While the 50/20/30 budgeting philosophy is a great tool to allocate your money, it won’t eliminate the need for or provide a means to track your daily expenses, which is a must if you want to stay on budget. You’ll need to use a budgeting app or another system for that.
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How to Make a Retirement Budget

Planning your finances using a retirement budget can improve your peace of mind and lessen your stress about money in your golden years. Plus, calculating your budget will help you avoid spending too much of your nest egg too soon—a financial mistake many retirees make.

With a few simple steps, you can develop a budget that accounts for your obligations but leaves plenty of room for enjoyment.

Importance of a Retirement Budget

Many factors can affect your retirement income: inflation, rate of return on savings and investments, your retirement date, taxes, spending, part-time earnings, Social Security, and pensions if any.

You have the most control over one critical factor: your spending. Once you’ve retired, it may be tempting to see that sizable nest egg you’ve saved as a good excuse to start checking items off your bucket list. But over-spending can be financially dangerous; you’ve got to make your savings last, likely for decades.

You may find you’re willing to make certain trade-offs to retire earlier, travel more, or spend more on fun and hobbies. A good, detailed budget helps you live within your means, enjoy your life, and make your savings last as long as possible.

Find Your Fixed Expenses

Start to create your retirement budget by gathering the following items:

  • Bank account statements for the last six to 12 months
  • Credit card statements for the last six to 12 months
  • The last two pay stubs, if you or your spouse is still employed
  • Last year’s tax return

Look for all of your recurring monthly, quarterly, or annual payments. Using highlighter pens, divide your expenses into the following categories:

Essential Spending

This category of spending includes food, clothing, housing, utilities, transportation, and health care.

Non-essential Monthly Expenses

These include things you receive a monthly bill for, such as cable TV, streaming services, gym memberships, cell phone plans, or other subscriptions.

Required Non-monthly Expenses

Bills for property taxes, insurance premiums, auto registration, and home warranties may arrive once a year. Add up these periodic expenses and divide by 12 to calculate their monthly cost to include in your retirement budget.

Use lined paper or a computer spreadsheet program to account for the timing of expenses. List the months, January through December, across the top in separate columns. Down the left side of the spreadsheet, list each expense on a separate line.

If your utility bill runs an average of $200 a month, put $200 in each monthly column. For Christmas gifts, if you spend about $500 a year, divide the $500 in two and put half each in November and December. Do this for each expense item, then find the sum for each month. These are your fixed costs.

Account for Health Care Costs

If your employer has been paying your health insurance premiums, after retirement, you may have to pick up the tab. If you retire before age 65, you’ll need to explore the available options for health care coverage before your Medicare kicks in. Shop for plans now so you can add an estimate of that monthly expense into your budget.

Don’t forget about dental, vision, and hearing care. Add those expenses to your budget, too. Estimate other health expenses such as medication as well, so you have the full picture when creating your retirement budget.

Factor in Fun

Discretionary spending is the flexible part of the budget that includes all the fun stuff, such as travel, grandkid outings, sports, and other entertainment. Do you love to dine out or want to go on a yearly cruise? Figure out how much you’d like to spend on these fun retirement activities, then figure them into your budget.

Consider how your hobbies and lifestyle may change, as this could affect the way you spend. If married, ask your spouse to do this also.

If you plan to spend your newfound free time in pursuit of expensive hobbies, you must account for that spending in your budget. Think about changes you may be willing to make to free up money for these activities; the trade-off may be worth it. For example, if you want to travel more, would you be willing to downsize and live in a smaller home to reduce housing costs?

Calculate Fixed Versus Flexible Costs

Now that you’ve gathered all your expected costs, calculate how much is fixed and how much is flexible:

  • Total all your fixed expenses
  • Total all your other, non-fixed expenses separately
  • Divide your fixed expenses into your total expenses

What percentage of your retirement income will go toward fixed expenses? Does this align with your thoughts in step three on how you want to spend your time in retirement? If you have large monthly obligations for house and car payments, for example, maybe a lifestyle change is in order.

As a general rule of thumb, if you want more fun in retirement, find ways to lower your fixed expenses so you can have more flexible funds available to spend on the interests you most enjoy.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.

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Budgeting Discretionary, Variable, and Fixed Expenses

Although only around one-third of Americans use a household budget, there are substantial benefits to laying out a spending plan. Making and following a budget can help increase your financial security and build wealth.1 

Whether you’re budgeting for the first time or updating your existing spending plan, it’s essential to account for your income sources and your expenses. Every month, you probably spend in these categories: 

  • Fixed expenses
  • Variable expenses
  • Discretionary expenses

Let’s look at each of these different expenses. 

Fixed Expenses

Fixed expenses are necessary ongoing costs that don’t change in amount or frequency. They might arrive monthly, twice a year, or once a year.  For example, you may pay insurance premiums twice a year, but the payment is identical and predictable. Some common examples of fixed expenses include:

  • Rent or mortgage payments
  • Insurance premiums
  • Health or car insurance
  • Phone plans
  • Bus pass
  • Payments on fixed-rate personal or student loans
  • Daycare or school tuition costs

Saving for retirement, emergencies, and other financial goals could be considered a fixed expense to ensure you’re working towards building wealth and preparing for the future. 

Variable Expenses

Variable expenses are still necessary costs, but the amount changes every month, often in concert with your usage or choices. Your monthly utility bill might cost much less in September when you don’t have to run the air conditioning in July or use heat in January. 

Some examples of variable expenses include:

  • Electricity costs
  • Groceries
  • Transportation/gas expenses
  • Vehicle maintenance
  • Gas or oil
  • Clothing costs
  • Payments on variable-rate loans

With variable expenses, you probably have some control over how much you spend. For example, you need clothing, but you can reduce costs by switching to shopping at consignment shops instead of buying brand-name items from more expensive stores. 

Discretionary Expenses

Finally, discretionary expenses are those that are desirable, but you have discretion (or individual choice) over whether to spend on them or not. To determine whether something is a discretionary expense, consider whether it’s a want or a need. You need food, but you don’t need it to come from a restaurant. So, groceries are a variable expense, but dining out is a discretionary expense.

Examples include:

  • Entertainment
  • Dining out at restaurants
  • Video games, magazines, and comic books
  • Streaming TV subscriptions
  • Personal care (nail salons, haircare)
  • Gifts
  • Vacations

Some expenses can contain discretionary, variable, and fixed categories. For example, you may need a cell phone for work or health reasons. Choosing between a brand-new phone or an inexpensive or refurbished phone is a variable expense. The basic, limited monthly voice plan is a fixed expense. However, an unlimited data plan is unnecessary. That would be a discretionary expense.

Budgeting for Expenses 

Go through your credit card or bank statements to sort your expenses into the three categories. How much have you been spending? Which costs will remain the same, and which can change? If your spending is greater than your income, how can you cut your expenses? 

Start With Fixed Expenses

Then, when making your budget, always start with fixed expenses. These are the simplest to account for and often the most difficult to change. However, it is possible to reduce your fixed expenses. You can refinance to lower your house payment, or move somewhere the rent is lower. 

Even if a fixed expense arrives only once a year, you can account for it in your monthly budget. If a $5,000 tuition bill comes in one year, set aside $417 per month for 12 months in an interest-earning savings account until the payment is due. 

Next Come Variable Expenses

Variable expenses should come next since these are also required costs. Reducing variable expenses can be easier than reducing fixed expenses. If you want to cut energy costs, you could lower the thermostat setting or unplug power-hungry (but infrequently used) appliances. 

The Rest Goes to Discretionary Expenses

Finally, allocate remaining money for discretionary expenditures. Discretionary expenses are often the first cut when looking for money-saving opportunities. Spending money on these expenses is optional, and unnecessary to maintain your health or safety.

One popular budgeting option—the 50-30-20 budget—involves dividing in the following manner:2 

  • 50% for household spending, including fixed and variable expenses
  • 30% for your wants or discretionary spend items
  • 20% for your savings account and for paying down debt

If sticking to your budget is challenging because you’ve already slashed discretionary expenses, consider cutting fixed costs to help you stick with your financial plan. 

The key is to make sure that the total amount of your expenses doesn’t exceed the income available to you and budgeting for savings. Your resulting financial plan can help you avoid debt and build wealth. 

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6 Steps to Creating a Monthly Household Budget

Download and Print a Budget Worksheet

Use a worksheet to help get started in order to complete all the steps below. You can also create your budget worksheet using free spreadsheet programs, including the ones offered by Vertex42 and It’s Your Money, or even paper and pen.

List Your Income

Start by figuring out how much you’re bringing in each month. Add up all reliable sources of income: wages from a job, alimony, child support, and more. Notice that word reliable. If you get cash from outside jobs or hobbies, but not on a regular basis, don’t put the money down as income in your budget. Your budget should be a document you can depend on.

If you’re self-employed or have a fluctuating income, use an average monthly income or an estimate of the income you expect to receive in a particular month.

Add up Your Expenses

Some of your monthly expenses are fixed—mortgage/rent, property taxes, child support, and alimony—while others may vary, such as electricity, water, and groceries. List all the fixed expenses and the amount of the expense.

For your variable expenses, write the maximum amount you plan to spend in that category or the amount you expect your bill to be. For example, you might plan to spend $500 on groceries and $150 on gas.

Use your previous bank and credit card statements to help you figure out what you typically spend each month. Reviewing your previous spending can also help you uncover categories of spending you may have missed.

Some of your expenses don’t occur each month. But accounting for those periodic expenses in your monthly budget can make it easier to afford them when they’re due. Divide yearly expenses by 12 and semiannual expenses by six to come up with the monthly amount to account for in those categories.

Calculate Your Net Income

Your net income is what you have left over after all the bills are paid. You want this to be a positive number so you can put it toward your debt, savings, or other financial goals. Calculate your net income by subtracting your expenses from your monthly income. Write down the number, even if it’s negative.

Adjust Your Expenses

If your net income is negative, it means you’ve budgeted to spend more than your income. You’ll have to correct this. Otherwise, you may end up having to use your credit cards, borrow money, or overdraft your account to make it through the month.

Variable expenses are typically the easiest places you can adjust spending, e.g., eating out, hobbies, and entertainment. Even some of your fixed expenses can be adjusted, e.g., by reducing your cable or phone bill, canceling your gym membership, or not taking a vacation this year.

Evaluate your spending using a “wants vs. needs” analysis. Reduce or eliminate spending in those “want” areas to make more room for the things you “need” to spend money on.

Track Your Spending

Throughout the month, track your actual spending against what you budgeted. If you go over budget, doing this will help you figure out where you spent more money. In the future, you can take greater care not to overspend in that area. Or you may need to adjust your budget to compensate for the additional spending. If you increase your budget in one area, decrease it in another area to keep your budget balanced.

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Budgeting Tips

Once you have set up a basic budget, customize it according to your financial situation and goals.

  1. If you work on commission, be aggressive in saving to help cover periods when the market is slow. 
  2. If you have cash flow issues because you are paid only once a month, divide that payment by weeks, and keep the cash you planned to spend in remaining weeks in a separate account until you need it.
  3. Pay with a credit card only if you will have the money to pay it off at the end of the month. Otherwise, you will owe interest on top of the price of whatever you bought.
  4. Adjust your budget monthly if you find you overestimated or underestimated your expenses. Keep an eye on large expenses that only occur every few months, such as insurance payments.
  5. If you tend to overspend in certain categories, use budgeting hacks such as switching to a cash-only budget.
  6. Once your expenses are lower than your income, budget towards savings goals before you increase your spending.
  7. Take time to learn other financial skills to improve your financial literacy and make your money work harder for you.
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How to Use Your Budget

After you have set up your budget, you must monitor and continue to track your expenses in each category, ideally every day of the month. The same budgeting spreadsheet or app used to make your budget can also be used to record your expense and income totals.

Recording what you spend throughout the month will keep you from overspending and help you identify unnecessary expenses or problematic spending patterns. Take a few minutes each day to record your expenses, rather than putting it off until the end of the month. 

If you’re not confident that you can budget your money, adopt the envelope system where you divide cash for spending into separate envelopes for different spending categories. When an envelope becomes empty, you’ll have to stop spending in that particular category.

As you use your budget, keep an eye on how much you have spent. Once you have reached your spending limit in a category, you will either need to stop that type of spending for the month or move money from another category to cover additional expenses.

Your goal in using your budget should be to keep your expenses equal to or lower than your income for the month.