By Martha Brown Menard, PhD, Director of Financial Coaching, Questis
Do you have too much month left at the end of your money every paycheck? You’re not alone. About 75% to 80% of Americans live paycheck to paycheck, and roughly 30% spend more than they make. Life can be expensive, and all the big and little costs can eat up what you bring home. How does anyone manage to cover the bills and still pay down debt or save for retirement?
You need a budget to balance your income with your spending, so you can have enough left over to meet your savings goals and still have at least a little money to spend as you wish. But many people immediately feel resistant and even deprived at even the thought of being on a budget–kinda like the thought of being on a diet.
Forget budgeting–you need a spending plan.
What’s a spending plan?
Instead of a budget, which can feel restrictive, reframe the concept by focusing on where you want your money to go. You’ll still balance your income with your spending, make sure bills get paid, and save toward long-term and short-term goals. The big difference is that a spending plan is intentional. Find money to spend on what is important to you by reducing spending on what you don’t really care about. It also helps to set aside a small amount of money every month to spend on whatever makes you happy–guilt-free and without judgment.
When totaling up your income, be sure to include all of it. Besides your own, there may be additional income from a spouse, a part-time job or freelance work, or rental income and royalties. Keep track of everything you spend during the month and don’t overlook expenses that only get paid once or twice a year, like holiday gifts and insurance charges. You can either write it down or use an online budgeting tool—like the Questis platform, which can also save you time by automatically categorizing your expenses.
Organize your expenses into fixed, flexible, and financial goals. Every month, pay yourself first by saving. Make sure you are putting at least some money toward your financial goals and meeting your fixed, predictable costs like housing, car, or debt payments first. Then, what is left can go towards flexible expenses that can vary from month to month, such as groceries, utilities, transportation, and entertainment costs.
The 50-30-20 Approach
Many people like to use the simple budgeting method of allotting 50% to fixed expenses, 20% of income to saving for financial goals such as retirement or the downpayment for a house, and 30% to flexible expenses. It’s important to include some money in your budget for things and activities you enjoy, which makes it easier to stick to your spending plan. If you’re paying down debt, you might want to put some part of that 30% toward debt reduction until it’s paid off.
The primary benefit of having a spending plan is that your income now covers all your expenses, with money left over at the end of the month. Flexible expenses are where you can usually see the biggest savings, by using coupons, or taking advantage of sales. Consider ways to increase your income as well–this can often make a bigger impact. Learning new skills, for example, could increase your opportunities for promotion and a corresponding pay bump at your current job.
Paying all your monthly bills without resorting to credit cards is a necessary step toward being able to meet your longer-term financial goals. And having a spending plan can feel enormously freeing.
Tips For Managing Your Spending
First, set aside what you need to pay your fixed expenses and what you want to put towards your financial goals. You might set up automatic bill payments for recurring monthly expenses—you’ll never miss a payment and can avoid late payment charges. When you travel or make online purchases, use a credit rather than a debit card because credit cards offer fraud protection plus the ability to dispute a charge, if necessary. Just be sure you can pay it in full at the end of every month. Some cards offer cash or travel rewards. As long as you’re paying off the balance every month, using a credit card for everyday expenses can put a little money back in your pocket.
If you’re consistently having trouble making ends meet, there are only two things to do: cut back on your spending or look for ways to earn additional income. There’s a limit to how often you may want to eat ramen noodles for dinner, but there’s no limit to how much you can earn. Take on a seasonal job, or start a small solo business on the side to make extra money to spend or put towards your longer-term financial goals.