Kimberly Hamilton of Beworth Finance on how she tackled debt in D.C.
There are several different types of budgeting methods, so we suggest finding the one that fits with your personality and habits, and more importantly, one you can stick with. Here are a few types of budgets.
This method focuses on “paying yourself first” and allocating a portion of your income towards automatically saving. From there, you figure out how to make the rest of your expenses work.
Using this method, set aside money in the following order:
The underlying concept of reverse budgeting is to prioritize savings and eliminate debt.
You may have heard about this simple formula before. We write about it here.
50% Needs: Needs should be the absolute costs for what you need to live month to month. This can include groceries, utilities, transportation, insurance, housing, childcare, and minimum debt payments. If your needs are greater than 50% already, you will need to either dip into the wants category or try to find ways to keep your expenses lower (e.g., lowering utilities, refinancing debt, etc.).
20% Savings and Debt Repayment: This part of the budget should be to plan for your future. First off, you need to make sure you are allocating to these areas:
Emergency fund: You should have at least 3-6 months of living costs saved up. This is to ensure that in case of the unexpected, you will be able to avoid debt and have cash to use.
High-interest debt: If you have any high-interest debt, you should try to start paying this off ASAP.
Employee matching retirement: If your employer matches on your 401(k) make sure you also take advantage of this as it’s almost the same as free money. You get the chance for free money, a tax break, and you start building towards your wealth.
30% Wants: Wants should be things that are not essential for you to live and work such as eating out, travel and entertainment, etc. The difference between needs and wants can sometimes be a gray area, so just make sure that you define what’s important to you. For some people, that might be traveling once a year to a new city, so make sure you make room for that in your budget.
OK, this is old school but for some people, it works. Also… the higher-tech version of this is having separate credit cards or prepaid cards for uses. This is a way to force yourself to not overspend. The traditional way of using this method is all cash. Start by looking at how much you are bringing in every month in income and then begin allocating into the categories you want to spend on.
Once you know those numbers, get your envelopes out and start naming them for the allocated expenses. Every dollar has a job. $300 for groceries, $100 for gas, $100 phone, $800 for rent, etc.
This method has been helpful for many to control spending and by having an all cash method you avoid getting into credit card debt.
Now, you don’t have to just pick ONE method, you can mix them also. The key is picking one or two activities that you can stick with and that help you achieve your goals. Other tactics that you can mix in are “no spend days” which means you allocate days of the week where you don’t spend on going out or eating out or really on anything you don’t absolutely need to survive and get to work.
The other tactic is allocating into a budget a “fun fund” where you mix all of your variable expenses into a fund where you spend what you want. Some people want a more “free spirited” approach where you have an allocated amount for fun, for a lot of people this tends to work, as long as your other bills, debts, investments, and needs are met first.
Download our free budget template to get started!