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Budgeting is one of the most common ways to manage your money — or lack of it — but how do you know which method is the right one for you?
“As with any budget, how you allocate your income depends on your personal financial situation. The key is to create a budget you’ll actually stick to over time,” Courtney Alev, consumer financial advocate at Credit Karma, told The Post.
“One of the best ways to combat financial stress is to take action, even if the first steps seem small.”
The 75/15/10 rule directs people to divide their paychecks by putting 75% toward your needs, such as everyday expenses, then allocating 15% to long-term investing and 10% to short-term savings.
This budget allows for more spending than other popular plans and focuses on building wealth, but it doesn’t give much wiggle room for unexpected expenses or paying off large debts.
According to Alev, “The first step is to set clear financial goals by asking yourself what you’re hoping to do with your money in the short and long term.”
Are you planning to buy a brownstone? Pay off your student loans? Go to Greece this summer?
You have decisions to make — and bucks to bank.
In the past, experts have touted other percentage-based budgets, including the 50/30/20 and 60/30/10 plans. They may seem similar, but those formulas are surprisingly different.
The two systems focus less on building wealth and more on getting you your little sweet treat or on the next flight to your dream destination.
The 50/30/20 method guides people to allocate 50% of net pay for needs, 30% for wants and 20% for savings and debt repayment.
However, as many people struggled to maintain their “needs” by taking only half of their income, the plan was updated to 60/30/10 — 60% of your monthly take-home income for needs, 30% for wants and 10% shifted to savings.
“Over the last couple of years, we have seen pretty substantial inflation across most main spending categories. Housing prices, rent, interest rates and cost of basic goods have all increased dramatically,” Michelle Waymire, a certified financial planner and financial coach, told NerdWallet.
A recent survey conducted by Talker Research on behalf of EarnIn found that the average respondent — the team polled 2,000 employed Americans who make less than $75,000 per year — puts the majority of their funds (64%) toward “needs” such as food, bills and housing.
About 16% is dedicated to “wants,” and 16% gets put into savings.
However, more than half of people (56%) admitted that less than 10% of their paycheck is deposited into savings — and a staggering 23% can’t remember the last time they saved 20% of their income.
Just 20% of Americans make enough money to not run out of it or stick to a strict budget to get by.
Budgeting is a great way for people to manage their money, especially for the majority of Americans who mentally spend their paychecks before the cash even hits their bank account — but Waymire noted that these are suggested guidelines not rigid rules.
“One of the things that the 50/30/20 and the 60/30/10 budget have in common is that they’re just starting points to provide a general allocation for where your money goes,” she said.
“Neither of these budget guidelines are meant to be hard and fast rules because everyone’s situation is different.”
To audit your financial situation, Alev advises people to review their spending habits from the last few months and spot any bad behaviors — because retail therapy isn’t always worth it.
Once you understand your spending pattern, create a feasible monthly budget based on your usual monthly expenses — cutting out any unnecessary patterns — and both your short- and long-term financial goals.
“Taking the first step toward creating a budget may seem intimidating, but it doesn’t have to be. Know that you may not build the ‘perfect’ budget on your first try and will likely need to make adjustments over time,” Alev said.
