Maybe you have enough saved up in your bank account to buy a house or car right now (if you are—please teach me your ways), but if you’re not in that camp, now is a perfect time to get on board with budgeting.
During These Economic TimesTM, most people are probably dropping down to their “ramen noodle budget,” as Tiffany Aliche, financial educator and founder of The Budgetnista says.
But budgeting doesn’t have to look like a complicated web of spreadsheets on your laptop; you can keep track of your own budget, with literally no math involved, entirely from your phone. But first, you need to split up your paycheck into categories that make sense for your lifestyle. These are the tips you need to build your budget from scratch—and stick to it—straight from finance experts.
Split your checks into four-ish categories.
Each pay period is like a pizza with four core categories, Aliche explains. You should ask the HR or payroll department of your employer to split your paycheck four (not necessarily equal) ways, and to have four separate bank accounts, one for each “slice” of the pie, she adds.
One quick thing: Before you split up your paycheck, don’t forget about saving for retirement, Aliche says. “Ideally, before any slices, you should take a little bit of pizza, maybe the crust, and put it away in your retirement account,” she explains. That might look like putting 10 per cent (it sounds like a lot, but it's worth it!) of each check into a Roth IRA retirement account or a company-sponsored 401K. Got it? Moving on...
The first slice, which you “eat right away,” is the spending slice, so you should have a checking account with a debit card attached to it, Aliche says. This slice is for all your "cash" expenses that come up, like takeout, getting your hair done, and another non-essential spending.
The second slice, Aliche explains, falls on the floor before you even get to take a bite—this goes straight to your bills. It could be helpful to have a separate checking account to pay your rent or mortgage, insurance bills, groceries, and other monthly expenses—but don’t connect it to a debit card, so you don’t “accidentally” tap into those funds, Aliche says.
Slice number three should be a smaller piece that goes into the fridge for later in the week, and it’s also known as your “noodle budget,” according to Aliche. “The noodle budget is if you had to eat ramen noodles, and dig down to your necessities, cutting out the excess,” Aliche says. In other words, this is an emergency fund that you can live off of if you lose your job and need money for food and rent. “Multiply your bare-bones budget by six months, and that’s what you should save,” she adds. Always have emergency savings account to house that noodle budget.
The final slice, which “goes in the freezer,” Aliche says, is your long-term savings account. That means cash you’re putting away for a home, to start your own business or any other expense that’s a year or more in the future.
Half your paycheck should go-to essentials.
So just how big should each slice be? Most financial experts agree that 50 per cent of your income is going to go straight to essentials, aka rent, utilities, and insurance—that's the slice that falls on the floor if you're taking notes.
Make sure you’re laser-focused on saving too, says Brittney Castro, Certified Financial Planner at Mint. You should put aside 20 per cent of your income for savings (that's the ramen budget slice).
Kelly Lannan, Vice President of young investors at Fidelity Investments, breaks down that 20 per cent even further. “Fifteen per cent of each paycheck is what you should aim to save toward retirement, and 5 per cent goes toward a short-term savings goal,” she explains.
After all of that, you still have 30 per cent of your income left to treat yourself to “non-essential” spending (le first slice), Castro adds.
Track every penny you spend.
Stay on top of your budget and try to check in with it weekly to ensure it's in line with your financial goals, says Castro. Pay special attention to purchases in that non-essential spending category, and don't forget to account for the ones you make in cash. Downloading a budget app that holds you accountable for every hungover bacon egg and cheese.
It’s worth incorporating tracking all of your small expenses into your daily routine. “To get yourself into the habit, set a nightly alarm on your phone to add up all your expenses while all your purchases are still fresh in your mind,” says Castro.
Don’t use credit cards if you can’t handle them.
Credit cards can be a slippery slope, and one Aliche advises avoiding if you don’t have the willpower not to swipe your life away. But, if you are able to use your card for a large purchase and pay it off over a relatively short period of time, then charge it.
If you’re that person who puts the whole table’s bill on your card to get your dining points, then charges everyone on Venmo, and also pays off your bill every month, more power to you. As long as you can pay off your credit card bill in the next six months to a year, Aliche says, you’re set—if not, you’re paying more money for your purchases over time because of the interest you accumulate.
Cut out unnecessary subscriptions and other expenses.
Right now, it’s pretty much a sure bet that you’re not using your gym membership—or that massage membership, either. So it’s probably a good idea to freeze or cut out subscriptions that you haven’t used in the last three months, Aliche says.
Another smart trick to reduce your monthly bills is bargaining with your service providers. For example, call your car insurance company each year and ask if they can reduce your rate for your safe driving record (hopefully that’s the case), Aliche suggests. You can also try to make a deal with credit card companies or cell phone companies—but make sure you have specific numbers of rates their competitors are offering so you can barter, she says.
Prioritize what you actually need.
There has never been a better time to go deep when it comes to your overall saving and spending habits, Lannan says. “Also, more of us are prioritizing the importance of having an emergency or ‘life happens’ fund so we can weather the unexpected,” Lannan says. So you might have to rethink whether that bachelorette trip you put away cash for next year celebrating your college frenemy is actually an essential expense and save up that money instead. For any big life events more than three years out, consider reaching out to a financial planner to invest some of those funds, Lannan adds.
But with the economy the way it is, many people are finding themselves tapping into that “noodle budget.” Always know how much you need in your noodle budget to survive, Aliche says. It’s better to make sure that you have that cushion than to focus on getting out of debt. “Ask yourself, ‘of my expenses, what do I need to maintain my health and safety?’” says Aliche. It’s important to have emergency savings that you can turn to for times like these, she says, and anything else can wait.
Via Cosmopolitan US