To help get your finances on track and prepare for your future, you may want to start a budget.

Budgeting is the process of creating a plan for how you’ll spend and save your money to help achieve your goals.

To help you on your financial journey, we’ve gathered the following tips that can help with budgeting for young adults:

1. Track your spending
2. Prioritize paying off debt
3. Set short and long-term goals
4. Create a detailed plan
5. Try a zero-sum budget
6. Start an emergency fund
7. Take advantage of employer matching
8. Practice frugal habits
9. Follow the 50/30/20 budget
10. Save for retirement
11. Use a bullet journal
12. Talk to a professional
13. Keep taxes in mind
14. Try a side-hustle
15. Use personal finance apps
16. Protect your health
17. Negotiate your salary
18. Try the envelope method
19. Automate your savings

Ready to start budgeting? Let’s get started with these 19 financial tips!

1. Track your spending

Before you can get started on your young adult budget, you must first understand where your money is going. You can do this in many ways, whether by keeping track of your receipts, using an app, or setting up a spreadsheet.

When tracking your spending, it can be helpful to categorize your transactions to help get a sense of what you’re spending your hard earned money on. These categories may include rent, groceries, utilities, clothing, entertainment, and more.

Remember, there is no set group of categories you should follow, so be sure to categorize your spending however works best for you and your shopping habits. Once you get a big-picture sense of your spending, you can better organize a budget that makes sense for you.

2. Prioritize paying off debt

When looking to improve your future spending, it’s crucial that you don’t forget about any debt you may have. From student loans to credit card debt, prioritizing getting out of debt can help you get out from under any interest payments that are getting in the way of your financial goals.

You can prioritize paying off your debt in different ways, including:

• Snowball method: You can follow the snowball method by paying off your debts, starting with the smallest amounts and working your way up to the largest. This works well for people with small debts, typically less than $3,000.
• Avalanche method: With the avalanche method, you’ll prioritize paying off your debts by starting with the highest interest rates and working your way down to the debts with the lowest interest rates. That way, you’re limiting the time spent holding on to debt with high-interest rates and your overall interest expense.

Whether you decide to use the snowball or avalanche method, continue making the minimum monthly payments on all of your debts as you focus your extra money on paying off the highest-priority debts.

3. Set short and long-term goals

Setting short and long-term goals is a great way to boost your financial success. That way, you can always keep your eyes on the prize. Start a practice of writing down your goals, this will help keep them top of mind for you when you’re making daily spending decisions.

These goals should be customized based on your specific wants and needs. For example, a short-term goal may be to pay off all of your student loans within three years and a long-term goal might be to retire by age 60.

4. Create a detailed plan

A financial plan is a way to assess your current financial situation, identify long-term financial goals, and create a road map to achieve them.

No matter your financial situation or goals, creating a detailed financial plan for young adults is a surefire way to keep yourself committed to financial success. A budget and a financial plan may sound very similar. A budget is a tool for tracking and managing your spending and savings on a short-term basis, where a financial plan actually maps out your goals over the long-term and your plan to achieve them. You can keep it simple and do this using a pen and paper, or you can utilize spreadsheets, templates, budgeting apps, or whatever works best for you.

5. Try a zero-sum budget

Now that you have a sense of how to start a budget, you may wonder what type of budget you should follow. A popular option for young adults is the zero-sum budget. The zero-sum budget is a budgeting method in which you use every penny of your income every single month.

But don’t get your hopes up, as it doesn’t mean you get to blow all of your money on flashy purchases and summer vacations. Instead, you’ll allocate your monthly income towards your wants and needs, debt payments, and savings goals until every penny of your income is accounted for.

For example, let’s say you have a monthly income of $4,167. With the zero-sum method, your budget may look like this:

As you can see, by combining your spending and saving, you’re using up all of your monthly income while also meeting your savings and debt payment goals.

6. Start an emergency fund

Let’s face it. Life can get in the way sometimes. Whether it’s unexpected job loss, car damage, or any other financial emergency, there are times when we could all use some extra cash. Fortunately, you can help dampen the financial burden of these situations by starting an emergency fund with your first budget.

Generally speaking, you’ll want your emergency fund to cover around 3-6 months of expenses. By building up an emergency fund, you can live your life in comfort, knowing you’re prepared to handle any unexpected circumstances that could impact your financial well-being.

7. Take advantage of employer matching

If you’re fortunate enough to work for a company that offers retirement plans with employer matching contributions, it can benefit your financial future to take advantage of it.

For example, if your salary is $50,000 and your company offers 6% matching with their 401(K) plan, your employer will match your contribution up to $250 each month. This means if you decide to contribute $250 a month towards your 401(K), your employer will also contribute $250 bringing the total monthly contribution into your 401(K) to $500. 

By taking advantage of this benefit, you can increase the amount of money that goes towards your retirement every month, allowing you to build up your retirement savings and accumulate wealth more quickly.

8. Practice frugal habits

When prioritizing budgeting for young adults, adopt smart spending habits to avoid spending unnecessary money. Examples of these frugal habits include:

• Making meals at home: By prioritizing groceries over eating out at spendy restaurants, you can limit the money you spend on food every month.
• Shopping secondhand: Whether you buy a used car or furnish your home with used furniture, shopping secondhand can help you reduce spending.
• Skipping brand name items: Generic brands are usually much cheaper than their brand-name counterparts. By shopping for generic brands, you can cut costs at the register.
• Waiting before you buy: If you’re prone to impulse spending, try forcing yourself to wait a few days before making any big purchases. Often, waiting it out can help you realize if your desired purchase is truly necessary.
• Learning to say “no”: In some cases, you may get invited to do things that go against your financial goals. By learning to say “no,” you can avoid committing to things that may be beyond your financial means.
• Buying in bulk: From toilet paper to canned goods, buying in bulk can sometimes come with huge savings, keeping you from paying more than you have to for your essential items.
• Buying essential items only: By sticking to only the essentials every time you shop, you can avoid throwing money away on unnecessary junk spending. Creating a list before you go shopping can help you stick to the task at hand and not get distracted by what you see.

While nobody goes from a mindless spender to a frugal shopping wizard overnight, keeping these frugal habits in mind can help you spend less on your shopping outings.

9. Follow the 50/30/20 budget

Another popular budget for young adults is the 50/30/20 budget. Under the 50/30/20 rule, you’ll split up your monthly income as follows:

• 50% for essentials
• 30% for wants
• 20% for savings

For example, if you make $4,167 a month, you’ll dedicate $2,083.50 to essentials, $1,250.10 to wants, and $833.40 to savings.

By sticking to this simple rule, you can easily budget your spending without skipping out on fun purchases and experiences, all while satisfying your monthly savings goals.

10. Save for retirement

As a young adult, meeting your retirement goals can seem like a far-fetched idea or tomorrow’s problem. But the reality is there is no better time to start saving for retirement, as the earlier you start, the quicker you’ll be able to retire.

This is especially true due to compound interest. In simple terms, you can think of compound interest as “interest on your interest,” meaning the quicker you save money for retirement, the more time it has to grow.

Let’s say you begin saving $150 a month with an average positive return of 1% a month, compounded monthly over 30 years. After those 30 years, your retirement savings will be nearly $525,000.

On the other hand, let’s say you waited 30 years and instead invested $1,200 a month for ten years with the same average positive monthly return. Despite your increased monthly contribution, your retirement savings would only be around $275,000.

As you can see, time is your friend when saving for retirement. Keep in mind that many compound interest accounts require a minimum deposit to get started. Because of this, be sure to do your research and select an account that works best for your financial situation.

11. Use a bullet journal

Another popular way to create budgets for young adults is to use a bullet journal. A bullet journal is highly customizable and includes specific sections you can use to organize your spending, goals, time, and other aspects of your life.

Because there is no right or wrong way to use a bullet journal, you can organize your pages however you’d like. This is a helpful method for those who prefer to physically write things down rather than using a digital method such as a spreadsheet.

12. Talk to a professional

A lot of the time, people may wait until they have a lot of money or are in a crisis before seeking help from a financial advisor. But that doesn’t have to be the case with you.

By being proactive and going over your finances with a professional, you can help come up with a plan tailored to your income, expenses, and financial goals. Plus, it doesn’t hurt to have someone who can answer all of your questions and help you create a personalized budget based on the advice of an expert.

13. Keep taxes in mind

Whenever you’re thinking about budgeting and financial planning, you’ll want to keep your taxes in mind. After all, the amount of money listed for your salary isn’t the same amount that will reach your bank account. Because of this, always use your monthly income after taxes when planning your budget.

In addition, you’ll want to do your research and see if you’re eligible for any tax deductions that can put money back into your pocket. Examples of common tax deductions include deductions for student loan interest and charitable donations.

If you’re unsure what deductions you qualify for, you may want to talk to a tax professional.

14. Try a side-hustle

If you’re looking to turn your free time into some extra cash, you may want to take up a side hustle. Side hustles can vary, from picking up an extra job to turning one of your unique skills or talents into a source of income. Need some side hustle inspiration? Try one of these ideas:

• Become a rideshare driver (Average hourly pay: $21.41)
• Tutor your favorite subject (Average hourly pay: $18.33)
• Sell your talents as a freelance writer (Average hourly pay: $24.26)
• Start babysitting (Average hourly pay: $16.22)
• Become a dog walker (Average hourly pay: $17.54)

No matter your interests or talents, there are many paths to bring in some extra income. If time is a limiting factor, consider passive income sources.

15. Use personal finance apps

For those interested in using technology to help with budgeting ideas for young adults, there are numerous personal finance apps you can use to take control of your finances.

From tracking your spending with a budgeting app to practicing long-term investing with an investing app like Stash, your phone can be a valuable tool for staying on top of your financial goals.

Not only that, but personal finance apps are a great way to manage your budget and finances wherever you go, with some apps even offering the option to link your debit or credit cards to give you an up-to-date view of your monthly spending.

16. Protect your health

Even if your goal is to save as much money as possible, you shouldn’t write off medical insurance as an unnecessary expense. Accidents happen, no matter how careful you are, and medical insurance can be the difference between small out-of-pocket costs and life-changing medical bills.

Something as minor as an accidental sports injury could end up costing you thousands of dollars if you’re uninsured and could put a massive roadblock in between you and your financial goals. Because of this, research what medical insurance is best for you. In some cases, it may be offered through your employer.

17. Negotiate your salary

On top of prioritizing saving money to improve your financial well-being, you can also work towards increasing your monthly income by negotiating your salary. When negotiating your salary, you should first determine your fair market value by assessing the salary of similar job postings.

Then, you’ll want to bring evidence of your value to the company to help show your boss why you deserve a raise. From there, be prepared to answer any questions your boss may have. While this isn’t guaranteed to work every time, you may be able to earn an increased wage which can help you achieve your financial goals.

18. Try the envelope method

Another popular budgeting method for young adults is the envelope method. The envelope method is a budgeting system used to help control where your money goes.

With the envelope method, you’ll want to dedicate an envelope to each spending of your spending categories. For example, if you allow yourself $500 a month for groceries, you’ll want to cash your paycheck and then put $500 into your grocery envelope.

Then, when it’s time to go grocery shopping, you’ll take the $500 and start shopping. Once you’re finished, you’ll put the change back into the envelope, so it’s ready for next time. Once you run out of money, you’re done buying groceries for the month.

This method is a great way to keep yourself from overspending, as you’ll have a physical sense of the money that is leaving your hands with each purchase.

19. Automate your savings

Another great way to help with your budgeting is to automate your savings. Depending on your checking or savings account, you may be able to set up automatic transfers every month. An example of this would be an automatic monthly transfer of $100 into your savings account or emergency fund. Another method to automate savings is to split your paycheck into two different accounts each payroll period, this way a portion of your money goes directly into a savings account where it is out of sight and out of mind.

That way, you can rest easy knowing that your savings goals are being met without you even having to lift a finger, allowing you to focus on other aspects of your financial health, like saving money or earning extra income.

Why you should start budgeting as a young adult

As a young adult, you may feel that budgeting is something that can wait. But by putting off prioritizing your financial health, you’ll be missing out on a wide range of benefits, including:

• Financial stress relief: Taking the time to plan your finances and set spending limits can help you get a birds-eye view of your finances so you have a better understanding of what you can afford. This can help prevent the money stress that can come from poor money management.
• Debt-free living: A large benefit of budgeting is that it allows you to allocate specific amounts of money to help pay off your debts. By prioritizing debt payments early in your life, you can limit the money wasted on interest payments.
• Earlier retirement: When it comes to retirement, the earlier you start saving, the earlier you can retire. Because of this, taking control of your spending at a young age can help maximize your retirement savings.
• Increased savings: By automating your savings and starting an emergency fund during your budgeting process, you can increase your overall savings.
• Preparation for the future: Similar to planning for retirement, setting a budget can help you be better prepared for the future, whether you’d like to purchase a home or go on an international vacation.
• Long-term growth: If you start taking your finances seriously at a young age, you can reap the benefits of time, leading to increased growth compared to starting years down the line.

When it comes to budgeting for young adults, remember that the earlier you start, the better. Whether you’d like to quickly get out of debt or take the money you’ve saved to grow your wealth with long-term investing, focusing on budgeting is a great first step to getting your finances in check.

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Budgeting for young adults FAQs

Still have more questions about budgeting advice for young adults? We’ve got answers.

How do you keep track of a budget?

You can keep track of a budget in many ways, including using a pen and paper, spreadsheets, budgeting templates, a bullet journal, or budgeting apps.

Is the 50/30/20 rule realistic?

While the 50/30/20 rule can be a realistic option for some, it may not work for everyone’s specific financial situation. Because of this, prioritize following a budgeting plan that works best for you and your financial goals.

What is the 70% rule for budgeting?

The 70% rule for budgeting is when you allocate your money as follows:

• 70% for all spending
• 20% for saving and investing
• 10% for debt payments

The post Budgeting for Young Adults: 19 Money Saving Tips for 2024 appeared first on Stash Learn.

What is the 50-30-20 budget?

The 50/30/20 budget rule is a budgeting guideline in which you divide your monthly income among three broad categories: 50% to needs, 30% to wants, and 20% to savings/investing. 

• 50% goes to needs: These are your essential living expenses and bills that must be paid; if you have debts, include at least the minimum payments in this category.
• 30% goes to wants: These are the things you’d like to spend money on but could live without.
• 20% goes to savings: This bucket includes sinking funds for short- and mid-term savings goals, your emergency fund, and long-term investments like retirement.

What’s the difference between a want and a need?

What counts as a “want” and what counts as a “need” will look different for different people. 

Your needs are unavoidable bills. These generally include food, housing, transportation, utilities, and debt payments. They can also include things like childcare, medical costs, care for family members, tithing, and more. Think about all the money you have to spend in a month to take care of your and your family’s must-haves: those are your needs.

On the other hand, your wants are the things you’d like to have or do but could do without. Typical wants include things like entertainment, takeout, hobbies, gym memberships, and subscriptions. They can also include things like classes, gadgets, home decor, and other more expensive purchases.

Defining what you need versus what you want is very personal. For one person, a gym membership may be a want, something they enjoy but could give up if they had to. Someone else may be unable to live without a gym membership due to chronic pain or a lack of other options. Similarly, your lifestyle, where you live, who you support financially, and your dependents will all impact what you define as a want versus a need. A single young adult’s budget may look different than one for a family or someone with multiple dependents. For example, a parent working from home who doesn’t have childcare options might see a streaming service subscription as a need if their kids get home from school a couple of hours before the workday ends; that expense may be necessary for their kids to be safely occupied while they get their work done. But a college student who has a tight budget may see that subscription as a nice-to-have.

Organize your needs and wants, on paper or mentally, before you get started making a budget. That way, you’ll go into your 50/30/20 budget with a framework already started.

How do you budget for savings and investing?

The savings category is for your short, mid-term, and long-term savings and investments. There are three primary areas to consider.

• Emergency fund: Your first savings priority is an emergency fund. Many experts recommend keeping six months of expenses in your savings account so you won’t have to struggle if your water heater breaks, your cat needs surgery, or you have an unexpected medical cost. This amount can also be a buffer to get by if you unexpectedly lose your job.
• Savings goals: This is the money dedicated to your short- and-mid-term goals. These goals might include smaller expenses like upgrading your laptop, buying new shoes, or getting tickets to an upcoming concert. You might also have bigger goals like buying a car, funding a wedding, or putting a down payment on a house. The size and type of your goals will vary and change over time.
• Retirement: Finally, putting aside money for retirement is part of your savings/investing category. Most experts recommend you dedicate at least 10%-15% of your monthly income to retirement. Consider starting with a set percentage going into your retirement account and increasing your investments annually. The sooner you start, the better, as your investments can benefit from the power of compounding.

How you save money, how much you’re investing, and what you save for are going to shift over time as you achieve your short-term goals and are able to focus on your long-term investment opportunities. 

How do you budget for debt repayment?

Making the minimum payments on your debts is generally considered a need, because missing those can incur fees, damage your credit score, and even lead to collections. However, paying more than the minimum payments can help you get out of debt faster and reduce the amount of interest you pay in the long run. 

So if you have a lot of high-interest debt, it may make sense to shift the 50/30/20 rule temporarily to pay down your debt faster. You could use a 60/20/20 rule, or even 70/20/10, categorizing extra debt repayment as a need and devoting more of your income to that category.    

5 steps to budgeting with the 50/30/20 rule

Since your budget is unique to your lifestyle and circumstances, there are several steps you need to take to ensure you have all the information you need for a successful 50/30/20 budget.

1. Calculate your monthly take-home income

Step one is to understand what you have to work with. Add up the money you make each month from every income source you have. Look at your paystubs to see your actual take-home pay, which is what you get after you pay taxes. Also include any other money coming in, like child-support payments, interest on savings, side hustles, or second jobs. If you make money as an independent contractor, don’t forget to set aside a percentage of your earnings from taxable income; don’t include the money you’re putting aside to pay your taxes when calculating your take-home income. If your income is inconsistent, consider starting by averaging what you made over the past three months and using that as your framework. 

Once you know how much money you have, it’s time to bucket it based on the 50/30/20 rule. 

2. List all your needs

Next, make a list of your needs, those things you can’t live without. Start with your monthly bills, and then consider your quarterly and yearly expenses. You can account for those expenses by dividing them by three, six, or twelve. 

For example: 

• A quarterly water bill that’s $150 can be budgeted as $50 a month: $150 divided by three months
• If you get a $60 oil change every six months, that could be $10 a month: $60 divided by six months
• A yearly insurance bill that’s $1,200 can be $100 a month: $1,200 divided by 12 months

Now add up all those expenses and see how close you fall to the 50% allocation for needs. If your needs are 50% of your income, or pretty close, you’re ready to take a look at your wants. 

If your needs are more than 50%, look for opportunities to reduce your costs. Are there cheaper options for some of the things on your needs list? Could you get by with a less expensive phone plan? Shop around for lower insurance rates or special internet/phone bundles. Finding less expensive options is ideal, but not always possible. Don’t be afraid to shift to a 60/20/20 structure while you look for cost-cutting opportunities.

3. Determine your wants

Your next priority is understanding your wants. Initially, focus on the money you already spend to see if it adds up to about 30% of your income. Take a look at your transactions over the last couple of months to get a realistic idea of the don’t-need-but-really-want expenses in your life. If the total cost of your wants falls around 30% of your take-home pay, you’re good to go. 

If your wants exceed the 30% allocation, consider prioritizing them so you can cut or delay those with the lowest priority. Be realistic when making these decisions: if you cut out too many of life’s little pleasures, there’s a good chance you’ll start feeling deprived and blow your budget with impulse buys. And on the flip side, if you prioritize lots of wants that don’t really give you much enjoyment, you’re losing the opportunity to save up for the things you truly want down the line.  

Budget tip: If your wants are coming in way over the budgeted 30%, consider shifting the more expensive items to the savings category and saving up for them over the course of a couple of months. This way, you’re sticking to your 50/30/20 rule but can still afford to buy the things you really want by planning ahead.

4. Decide your savings/investing split

The last 20% of your budget is all about savings. Take a look at your short-term, mid-term, and long-term dreams and set your savings goals. What do you want to achieve this year? In the next five years? What about retirement?

Your first priority is likely filling your emergency fund so you can cover the recommended six months of expenses. Once you’ve done that, or if you already have an emergency fund, you’ll want to think about your savings and retirement split.

How you break down your 20% is up to you, but here are some questions that might help guide you as you ponder your options.

• Do you have any big goals coming up, such as a house or wedding?
• Do you have any expected expenses coming up in the next few years, like a new roof, upgraded computer, soccer camp for your kids, or educational courses? 
• How reliable is your income, and how much of a safety net do you already have?
• Are your retirement investments matched by your employer?
• How old are you, and how soon do you hope to retire?

Remember to look at the timeline, size, and priority of your goals. Start as simply as you can; it’s always possible to add goals and complexity over time. 

5. Learn and adjust as you go

Now that you’ve implemented the 50/30/20 rule, it’s time to stick to it and make adjustments along the way. Here are a few tips for making the most of your budget: 

• Create a system. Whether you use an app, spreadsheet, or pen and paper, the 50/30/20 budget will only work if you stick to it. Automating with tools can help, but your priority is creating a sustainable and realistic budget and saving strategy.
• Schedule a regular money date with yourself. Make sure to check your progress. You can start with weekly check-ins to see how it’s going and make adjustments if things aren’t working quite how you planned. If your budget doesn’t work one week, see what went wrong and make the necessary adjustments for the next. The better you understand your income, expenses, and savings, the better you’ll be able to manage your financial health. 
• Celebrate your wins. It’s easy to focus on what didn’t work, but make sure to celebrate your budgeting successes so you stay motivated and excited about managing your money.

Is the 50/30/20 rule right for you?

The 50/30/20 rule is a simple way to make sure you’ve got the essentials,, while still enjoying things you want and putting money into savings and investments. 

Of course, there isn’t a one-strategy-fits-all solution. If you try out the 50/30/20 rule and it isn’t for you, consider giving zero-based budgeting a try. The best budget is one you can stick to and one that gives you confidence with your money. With the right tools and the right budget, you can change your approach to spending, saving, and investing to set yourself up for long-term financial success.

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The post Exploring the 50/30/20 Rule: A Simple Budgeting Strategy appeared first on Stash Learn.

In this article, we’ll cover:

• Why you need an emergency fund
• When emergency funds come in handy
• How much you should save up
• How to build your emergency fund
• Where you can keep your savings
• Emergency savings vs other savings

Why you need an emergency fund

Without emergency savings, you wind up sacrificing your future plans to stay afloat during a time of need. Think of your emergency fund as a double-pronged defense: it protects you in the moment when unforeseen expenses arise and safeguards your ability to build long-term financial health.

• Avoid racking up debt: An emergency fund prevents you from relying on credit cards or loans for unexpected expenses, so you don’t have to accumulate debt, pay interest on loans, or risk damaging your credit score.
• Don’t deplete your savings: Instead of withdrawing money you’ve earmarked for other savings goals, an emergency fund ensures you have a separate cache in case of a crisis.
• Protect your investments: With an emergency fund, you won’t be forced to liquidate investments before you’d planned to, potentially taking a loss in the process.
• Maintain peace of mind: Knowing you have money in reserve reduces the worry that a financial emergency could undermine your financial stability, especially during challenging times.

When to use an emergency fund

An emergency fund is a safety net to cover large expenses, generally over $1,000, or to sustain you if you lose your income. It’s crucial to use it only when it’s truly urgent and necessary; if you deplete your emergency savings for non-essentials or to cover normal monthly expenses, the money won’t be there when you genuinely need it.

Emergency expenses

An unexpected expense is just that: unexpected. That means you can’t necessarily anticipate what you’ll need emergency savings for. That said, there are some common scenarios in which people rely on an emergency fund. 

• Major car repairs: Situations like a car accident, engine failure, or a transmission issue can all pose a high financial toll.
• Home repairs: Whether you’re a homeowner dealing with a failing furnace or a renter fighting a bedbug infestation, unexpected home repairs can be costly.
• Medical emergencies: Health is unpredictable. From sudden surgeries to treatments not covered by insurance, medical expenses can take you by surprise.
• Unplanned travel: Sometimes, urgent trips are unavoidable. Whether it’s attending a family emergency, a funeral, or assisting a sick loved one, having funds set aside can ease the journey.

Income loss

Even the most stable-seeming job can go up in smoke, so it’s important to be prepared for the possibility of unemployment. If you face a sudden loss of income due to layoffs or health issues, an emergency fund can help cover your living expenses without going into credit card debt while you find a new job. 

Emergency cash is especially crucial if you’re self-employed or a gig worker, since government financial aid options like unemployment or disability benefits might not be available to you.

How much money should you have in your emergency fund?

A widely accepted rule of thumb is to keep three to six months’ worth of living expenses in your bank account for emergencies. The reasoning is that it can take many months to find a job, so you want to have enough to cover your living expenses in case of unemployment.

The exact amount for a healthy emergency fund will vary for everyone. To get a ballpark figure for yourself, jot down all your monthly expenses and multiply that by three (for the conservative side) or six (for a more comfortable cushion). The number you come up with might seem like a lot of money, and you may want to whittle it down by subtracting expenses you’d temporarily cut if you lost your job, like entertainment or treats. 

For example, say your total expenses add up to $5,000 a month. You’d need between $15,000 and $30,000 in your emergency fund to cover three to six months of living expenses. But if you were to remove some discretionary spending from your budget, you may find that $10,000 or $20,000 would be enough to get by if you tighten your belt.  

In reality, however, six months of living expenses sounds like an intimidating savings goal for most people. The good news is, you don’t need a specific amount of money to start an emergency fund. If you just start saving a portion of your paycheck based on what you can afford, your fund will grow over time.

How to build an emergency fund

Like any financial goal, building an emergency fund may sound daunting at first, but it’s much more accessible when you have a plan and tackle it in small chunks. 

The key is saving consistently and gradually increasing your contributions as you’re able.

Make a budget you can stick to

Building a budget is the foundation of managing your day-to-day spending, paying down debt, and working toward your savings goals. There are many different budgeting strategies out there, such as the 50/30/20 rule, the envelope method, and zero-based budgeting. The best approach for you is the one you can stick with. Include a line item in your budget specifically for your emergency fund so you’re adding to it bit by bit every month.

Automate your savings

One of the smartest moves you can make for your savings is to automate your contributions. By setting up a direct deposit from your paycheck into your savings account, you can tuck a portion of your earnings directly into your emergency fund before you even see it, thereby reducing the temptation to spend that money. Over time, this consistent, automated approach can significantly grow your emergency savings without feeling the pinch.

Take advantage of windfalls

Sometimes life drops a financial bombshell, but every so often you get a pleasant surprise as well. Windfalls like tax refunds, bonuses, and gifts are an opportunity to bolster your emergency savings. When you find yourself with extra money, consider channeling a portion into your emergency fund. Allocating windfalls to your savings can accelerate your fund’s growth, getting you closer to your financial goals without affecting your regular income.

Trim your expenses

Every dollar saved can be a dollar earned for your emergency fund. By reviewing and cutting back on non-essential expenses, you can free up more money for your savings. From cutting back on discretionary spending to reducing the cost of monthly expenses, look for practical ways to save money and funnel the extra cash into your emergency savings.

As you begin reviewing your spending habits, you might find some easy wins—such as canceling unused monthly subscriptions or seeking out the most cost-effective car insurance provider—these small changes can quickly reduce your total spending and free up dollars to grow your emergency fund.

Where to keep your emergency fund

When storing your emergency savings, two principles are key: liquidity and growth. Liquid means you can access your funds quickly and easily, without facing penalties. And growth is all about earning money on your savings. 

While it’s essential for your emergency cash to be accessible, you don’t want it to sit idle in your checking account. Opting for an interest-bearing savings account can help your emergency fund grow more quickly without you having to lift a finger.  

• Savings accounts: A traditional savings account offers a safe place for your money, typically with minimal or no fees. Many banks offer options with a low minimum required deposit; the trade-off is that these bank accounts usually pay lower interest than other short-term ways to grow your money.  
• High-yield savings accounts: These are similar to regular savings accounts, but offer a higher interest rate. This means your money can grow faster over time. Some might have higher minimum balance requirements or monthly fees, so be sure to read the fine print.
• Money market accounts: A money market account combines features of both checking accounts and savings accounts. Typically offering higher interest rates than standard savings accounts, they may also come with checks or debit cards. However, they might require a higher minimum balance and have monthly limits on transactions, making your emergency fund less liquid.

Emergency savings vs. other savings

Saving money is all about planning for the future, whether it’s unanticipated expenses or things you know you’ll need or want. An emergency fund is one component of an overall savings strategy; be sure you understand how it differs from other types of savings funds so you can plan accurately for all your financial goals.  

• Emergency fund: Emergency savings are for unexpected and significant expenses, typically those over $1,000, or even much more.  
• Rainy-day fund: Tailored for smaller unforeseen expenses, a rainy-day fund can cover living expenses you may not have accounted for in your budget. For instance, if there’s an out-of-the-blue spike in your water bill or a surprise visit to the vet, this fund comes to the rescue.
• Sinking fund: This is your planned savings pool. It’s for anticipated expenses you know are coming down the road, like regular vehicle maintenance, holiday gifts, or a vacation. When you have a solid emergency fund, you can rest assured you won’t have to siphon money away from these savings goals if you’re in a financial pinch. 
• Retirement savings: Preparing for your golden years is a marathon, not a sprint. Many people opt for tax-advantaged retirement accounts like IRAs or 401(k)s to maximize their savings. Withdrawing funds early can have substantial financial repercussions, so it’s extra important to rely on your emergency fund instead of tapping into retirement savings in a crisis. 

Protect your present and future with an emergency fund

An emergency fund equips you to navigate life’s uncertainties with confidence. And it also prepares you to work toward your longer-term financial health. Knowing you have a buffer to weather a financial storm empowers you to focus on saving and investing money to reach your bigger goals. 

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By understanding your income and expenses, you can create a budget using the 50/30/20 budgeting rule and determine just how much of your paycheck you should save or invest each month.

In this article, we’ll cover:

• Saving with the 50/30/20 budgeting rule
• When to break the 50/30/20 budgeting rule
• What to do with your savings
• Where to keep your savings

Determine your income and expenses

The first step to any savings strategy is to create a budget that will allow you to plan a specific amount to save after your expenses are covered each month. To get started, you’ll want to understand your income and expenses. That’s how much money is coming in and where it’s currently going. 

A good way to do this is to add up your income and expenses for the last two to three months, then calculate the average to get a sense of your usual monthly financial picture. Looking at a few months’ worth of financial records helps ensure you capture expenses that don’t come up every single month, and it’s especially important if you don’t make a consistent paycheck. 

To identify income, add up all the money you take home, which might include your paycheck, money from a side hustle, and payments from things like child/spousal support or government programs. Then take a look at your expenses: everything you’re spending your money on, including both necessities like bills and groceries as well as discretionary spending on things you want but don’t necessarily need. 

With a clear picture of your income and expenses in hand, you’ll be prepared to create your budget. 

Use the 50/30/20 budgeting rule 

The 50/30/20 budgeting rule can help you determine how much of your paycheck you should save by assigning every dollar you make to a bucket, determined by the percentage of income. 50% of your paycheck goes to your needs, 30% to your wants, and 20% to your savings/investments. 

What you consider a need versus a want is inherently personal and based on your unique situation and goals. For example, the nature of your work may require you to purchase a more powerful laptop. For you, that’s a need if you cannot do your work without it. Someone else may be able to accept a cheaper alternative, and a nicer computer would be considered a want.

Here’s how the buckets break down:

• 50% to needs: Everybody has different needs, but you can think about them as your necessary expenses. Typical needs often include rent or mortgage payments, utilities, insurance, car payments, groceries, debt payments, etc. Depending on your circumstances, needs also may include recurring medical costs, caretaking for a child or family member, education-related costs, public transportation, pet costs, tithing, and more. Look at your recurring expenses over the past few months to identify the expenses you have to cover each month and include them in your needs category. 
• 30% to wants: This category incorporates things like hobbies, vacations, dining out, streaming services, gym memberships, and recreational activities. The breakdown could end up encompassing many small expenses, like eating out, or a few larger ones, like a vacation or phone upgrade. Remember, it’s only a “want” if it isn’t necessary. For example, if you have to go to physical therapy to treat a medical condition, that’s a likely need, not a want. If you prefer the gym treadmill to running outside but could take the alternative, a gym membership may be just a want. It depends on what’s truly important to you.
• 20% to savings and investments: How you save and invest can also look different. You may want to focus on short- or medium-term saving goals like education expenses, a house or car, and building your emergency fund. Or you might want to invest for the long term with a brokerage account, an IRA or 401k for retirement, or an investment account for your children’s future education. Whether you’re saving for short-term goals or investing in your long-term financial future is very dependent on your situation. It is recommended that you start by building an emergency fund with enough savings to cover up to six months of expenses before moving on to other savings goals. 

When to break the 50/30/20 budgeting rule

Of course, how much of your paycheck you should save will depend on several factors, and the 50/30/20 rule doesn’t have to be exact. You may need more than 50% of your income to cover your needs, or you may need to save/invest more than 20% of your income to reach your goals. If you have a lot of debt or live in a high-cost-of-living city, for example, you may end up committing 60% of your income to needs, 20% to wants, and 20% to savings/investments. Or, if you’re saving for something important, you could rethink your breakdown and temporarily use a 50% needs, 20% wants, and 30% savings strategy. 

The 50/30/20 budgeting rule is a framework, and how you adjust it is dependent on your financial situation, lifestyle, savings goals, and needs. Here are a few specific scenarios in which you might want to allocate your income to categories a bit differently.   

High or low expenses vs. income

If your expenses are more than 50% of your income, you’ll need to adjust your budget strategy to compensate. First, identify what expenses are wants versus needs. If they’re mostly needs, adjust the 50% to cover the amount required. If they’re mostly wants, look for opportunities to reduce these costs to get closer to 30%. Even if you can’t commit 20% of your monthly income to savings/investing, you can still find ways to save money. Your priority is creating a realistic budget that works for you; saving 10% of your paycheck, or even just $10 or $20 a week, will build up over time. 

If your needs are less than 50% of your income, you have an opportunity to put more money into savings and investments. This is a chance to avoid lifestyle creep, which is when you artificially inflate your needs or wants to fit a higher income, and instead double down on achieving your financial goals. For instance, if you get a raise at work, you might consider putting some of that additional income toward your savings goals instead of increasing discretionary spending.

Large amounts of debt

If you have a lot of debt, especially high-interest debt, it may make sense to focus on paying down your debt before committing to saving 20% of your income. You’ll still want to maintain a healthy emergency fund, as emergencies can’t be avoided or predicted, but devoting more of your income to paying off debt faster will help you pay less in interest over time and could relieve some pressure on your budget. You can utilize the avalanche method, in which you pay your debts from the highest interest rate to the lowest, or the snowball method, where you pay down debts from the smallest to the largest amount. Once you’ve paid off your debt, you can re-adjust the framework and commit more money toward your savings goals or investing. 

Two-income households

How much of your paycheck should you save versus your partner or second-income earner? You can adjust your approach to the 50/30/20 budgeting rule to accommodate dual-income households. If both parties are earning roughly the same income, one earner could cover your household’s basic, necessary expenses in the 50% needs category. The second earner could commit their income to wants and savings/investing. This won’t work for all financial situations, but it can be a helpful framework for applying the 50/30/20 budgeting rule when sharing expenses. 

What to do with your savings

How you use your savings will depend on numerous factors. Emergency savings, a house fund, saving for education, and saving for your children or other family members are all common savings goals. There is no one-size-fits-all savings amount, and you should always factor in the stability of your employment situation and your lifestyle when setting your savings goals to ensure they’re realistic and achievable.

Build an emergency fund

First things first, focus on your emergency fund. The size of your emergency fund can depend on your current income, your existing savings and investments, how many dependents you have, and more. It’s recommended that you maintain an emergency fund with up to six months’ worth of expenses. That way, if you suddenly lose your job, your car breaks down, or you have a medical emergency, you don’t have to panic or go into debt to get by. 

An emergency fund is different from a rainy day fund; the latter is usually smaller and designed to cover more predictable, lower-cost things like car maintenance and your dog’s yearly vet visit. 

Set savings goals

Of course, determining how much of your paycheck you should save is only the first step; you still have to determine what you’re saving for. You’ll likely have short-term, mid-term, and long-term savings goals. Short-term goals are generally achieved in 12 months or less and might include things like planting a garden in the spring, saving for braces, upgrading your computer, taking a vacation, or saving for holiday gifts. Mid-term goals are a little further out: usually about one to three years. This can be something like putting a down payment on a house, moving to a different city, getting a new car, having or adopting a child, or having a wedding. Creating a sinking fund is best for these types of savings goals.

Remember, what you see as a short- or mid-term goal will depend on your income, other expenses, and timeline. Whatever the case, having specific saving goals can motivate you to stick with your plan and put that money aside instead of spending it.  

Invest for the long term

Long-term financial goals typically focus on retirement planning, wealth building, and financial freedom. These savings goals take a longer time to achieve but are well worth the work. They often look like contributing to a retirement account, building a diversified investment portfolio focused on long-term gains, or investing in an account for your child’s education. Often, people work toward these long-term goals by investing rather than keeping money in the bank, where inflation may outpace the interest earned. 

Where to keep your savings

While you technically can save your money in any account, there are some account types that amplify your savings because they earn interest or returns. When selecting what account to put your savings in, you’ll want to think about potential returns, how likely you’ll need to access that money, and how long you want it to stay in the account. 

• High-yield savings account: A high-yield savings account is best for short- to mid-term savings. These accounts act much like traditional savings accounts but pay more in interest. Like a traditional savings account, you may be limited to six monthly withdrawals, but your money can be accessed quickly if needed. A high-yield savings account can provide competitive returns, but remember that most interest rates are variable, so they could drop at any time.
• Certificates of Deposit (CDs): A certificate of deposit, or CD, is essentially a loan you extend to the bank. Your deposit earns a fixed interest rate for a set period of time. You’ll generally get higher interest than a traditional savings account, but you often can’t access that money without paying a penalty before the end date. The term length can vary from a few months to a few years. A CD can be a great place to store money you’re confident you won’t need to access before the term is up.  
• Retirement accounts: Retirement accounts like a 401k, IRA, or Roth IRA are for your long-term investments. These tax-advantaged investment accounts have deposit and withdrawal limits; typically, you can’t cash out your investments before age 59 ½ without incurring substantial penalties. You only want to invest money in these accounts that you won’t need to access before retirement. 
• Brokerage accounts: A brokerage account is a taxable investment account you use to buy and sell securities. Unlike a retirement account, you can invest as much money as you want and withdraw that money before retirement. A brokerage account can be a good vessel for mid- and long-term goals but comes with risks, as you can lose the money you invested. These accounts also aren’t tax-advantaged, so you’ll pay taxes if your investments receive dividend or capital gains payments, or if you sell securities that have gone up in value resulting in an investment gain.

Ready to start saving?

Once you’ve created a budget, you should be able to confidently decide how much of your paycheck you should save based on your personal circumstances. But your budgeting and savings journey isn’t over. The amount you save will likely shift as your income, expenses, and savings goals change. Budgeting and saving for young adults will likely look different from the approach that works for people in their 30s, 40s, and beyond. You can adjust your strategy to reflect your ever-evolving financial landscape by periodically asking “How much of your paycheck should you save?” with a fresh perspective.

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Budgeting doesn’t have to be complicated. This guide will take you through the process, including six steps for learning how to make a budget you can stick to.  

In this article, we’ll cover:

• What a budget is
• The importance of budgeting
• Calculating your net income
• Recording your spending habits
• Predictable vs. variable expenses
• Balancing your budget
• Types of budgeting
• Setting goals for your budget

What is a budget?

In its simplest form, budgeting is just figuring out how much you make and how much you spend and then using that information to inform your future financial decisions. Your budget allows you to plan how you’ll spend your income and keep track of money coming in and out. Tracking your spending lets you see your true financial picture in real-time so you can make informed choices. And planning ahead gives you a chance to put money toward your longer-term goals, like paying off credit cards, saving for a downpayment on a house, or planning for retirement.  

Why budgeting is important

Why learn how to make a budget? The short answer is that knowledge is power. It can be difficult to exercise control over your money until you have a clear picture of your finances. However, the benefits of budgeting extend far beyond just gaining financial control. Let’s dive into the specific advantages and rewards that come with implementing a budget.

Improved financial security

Let’s face it, life can be unpredictable. But with a budget, you can gain control over your finances and build a safety net. By understanding your financial situation, you can build an emergency fund to handle unforeseen circumstances, such as medical emergencies, car repairs, or job loss. This financial security provides peace of mind and reduces the stress that comes with financial uncertainty.

Reduced stress

Financial stress can take a toll on your well-being. Whether you’re living paycheck to paycheck or worrying about money in general, it can be overwhelming and emotionally draining. A budget gives you a clear overview of your income, expenses, and financial goals. It helps you identify areas where you can cut back, eliminate unnecessary debt, and save for the future. With a budget in place, you can make informed financial decisions and eliminate the anxiety that arises from financial instability.

Better decision-making

Picture this: you’re equipped with a budget that serves as your compass. It guides you to make intentional choices aligned with your goals. When you have a budget, every financial decision becomes more deliberate and informed. By tracking your spending habits, you become aware of patterns and identify areas where you may be overspending. This knowledge empowers you to make adjustments and allocate your resources according to what truly matters to you.

Ability to achieve financial goals

A budget serves as a roadmap for reaching your financial aspirations. Whether your goals include paying off debt, saving for a dream vacation, saving for a down payment on a home, funding a child’s education, or planning for retirement, a budget provides a structured approach to allocate funds towards these objectives. It helps you track your progress, make necessary adjustments, and stay motivated on your path to financial success.

Enhanced control and discipline

Setting a personal budget promotes discipline and self-control in managing your finances. It encourages you to prioritize expenses, distinguish between needs and wants, and resist impulsive spending. By consciously allocating your income, you gain control over your money and avoid the pitfalls of overspending or unnecessary debt. Over time, budgeting becomes a habit that empowers you to make smart financial choices that align with your values.

Improved relationships and communication

Money matters can strain relationships. Budgeting is not only a personal endeavor but can also benefit relationships. It fosters open communication about money between partners or family members, ensuring everyone is on the same page regarding any financial goal, spending limits, and saving strategies. Budgeting encourages accountability and cooperation, leading to stronger relationships and shared financial success.

6 Steps to budgeting your money

Step 1: Calculate your monthly net income

You may have heard the terms “gross income” and “net income.” Gross income is the total amount you earn before taxes, benefits, and other payroll deductions are taken out. Net income is the amount of money you actually take home every month after taxes and deductions. For budgeting, you want to identify your net income.

If your sole source of income is a job with a regular paycheck, it’s pretty straightforward: tally up the total amount of all your paychecks during a month. Your employer typically subtracts taxes and other deductions from your base salary before issuing your paycheck. 

You might have additional sources of income, so be sure to include those when calculating your monthly net income. This might include things like:  

• Alimony payments and/or child support 
• Government payments, like disability or veterans benefits
• Passive income, such as income from rental properties 
• Any money you earn from a side hustle or gig work

Step 2: Gather and record your expenses

Once you know how much money is coming in, figure out how much money is going out. Make a list of everything you spend money on every month and about how much you’re spending: bills, necessities, discretionary spending, etc. It can be tough to remember everything, so do some digging by looking at your records. 

You might start by reviewing statements from the accounts you use to pay for things, such as:

• Bank accounts
• Credit cards 
• Digital payment apps

Other useful information about expenses might be found in statements or receipts from:

• Car payments
• Car insurances
• Mortgage documents
• Utility bills
• Investment accounts
• Email receipts 

After your initial pass at tracking your expenses, consider some of the following options to help automate your tracking:

• Embrace budgeting apps: These user-friendly apps often allow you to link your bank accounts and credit cards and automatically categorize transactions and provide a visual representation of your spending patterns.
• Leverage online banking tools: Your bank’s online platform can have a treasure trove of features to help you track expenses. Explore the tools provided, such as spending categorization, transaction history, and spending alerts. 
• Use expense tracking spreadsheets: If you prefer a hands-on approach, a spreadsheet can be your best friend. Create a personalized template with columns for date, description, category, and amount. Enter your expenses regularly and categorize them accordingly. 
• Use the envelope system: The envelope system is a physical method where you assign cash to different envelopes, each labeled with a specific spending category. Whether it’s groceries, transportation, or entertainment, this system allows you to visualize your available funds and make mindful spending choices.
• Keep your receipts: Make it a habit to collect and store receipts for your purchases. Create a designated email folder for digital receipts and store your physical receipts in an envelope or folder.
• Account for cash transactions: Cash can be elusive when it comes to tracking expenses. Stay on top of it by jotting down cash transactions in a small notebook or using a budgeting app that allows manual entry.

Remember, effective expense tracking is crucial for accurate budgeting. Choose a method that works best for you and consistently track and categorize your expenses. Regularly reviewing your spending habits will provide valuable insights for making informed financial decisions and adjusting your budget as needed.

It can be helpful to look through 12 months of records to get a full picture of your spending. Some expenses vary from month to month, and any bill or subscription renewal that recurs yearly will only show up as a charge in one month over the course of the year. Budgeting requires being aware of and anticipating these expenses so you can plan for them. 

Step 3: Categorize fixed expenses vs. variable expenses

Among the easiest expenses to track are those that occur at regular intervals with the same amount, like rent or mortgage payments, your phone bill, and streaming services. These are called fixed expenses, and because they’re predictable, planning for them tends to be easier. 

Variable expenses, on the other hand, shift from month to month. They fall into two categories:

• Predictable expenses that you know will occur even if you don’t know the specific amount, like groceries or utility bills
• Unpredictable expenses that you can’t easily anticipate, such as home and car repair or health care emergencies

Expenses in the first category may vary from month to month but will typically stay within a certain range. The longer you track your spending, the better a feel you’ll get for how much to set aside for these categories. However, even these expenses can sometimes surprise you, as when gas prices suddenly rise. 

Unpredictable expenses are more challenging to budget for. If you own a car, you can reasonably assume that at some point it will need repairs, but you don’t know when or how much money it will cost. For this reason, many budget experts suggest building an emergency fund for contingencies. 

To get you started, here are some examples of different types of expenses: 

Step 4: Calculate your monthly income and expenses

This step is often referred to as balancing your budget; it can be the most sobering part of the process, but it may also be the most useful in planning for the future. If you want to gain any benefit from learning how to budget, you’ll need to be honest with yourself about your income and your spending habits. 

Add up all your monthly income and expenses, then subtract your expenses from your income. The number will tell you whether you’re in the red or in the black. Now it’s time to balance your budget.

• If you’re spending less than you earn, your income is enough to cover all your usual expenses. You can use your discretionary funds to store up for emergencies or start building your nest egg by saving or investing your money. 
  
• If you’re spending more than you’re taking in, you’re living beyond your means, and paying for things with credit cards can hide this fact for only so long. The good news is that learning how to budget will make it easier to gain control of your money. Look over your spending to see if there are areas where you can cut back, paying close attention to your non-essential spending. If you find that your spending is already at the bare minimum, you may want to look for additional sources of income.   

• You may also find that you’re generally in the black, but not by much, or that some months you come out ahead and some months you’re in the red. Reducing your spending on nonessential items might help you spend less than you earn more consistently and make it easier to plan for the future.

Step 5: Choose your budgeting method

You now have a clear picture of your financial situation; it’s time to start planning and tracking your spending. There are several approaches to budgeting, and each has its advocates. It’s up to you to find the method that works best for your circumstances and personality. You might even find that combining elements of different methods makes sense for you. What’s important is that you find a way of budgeting that you can commit to over the long haul.  

Here are some popular budgeting methods you might want to try out:

• 50-30-20 budget: The 50-30-20 budget helps you set your priorities by clearly laying out how much of your monthly income you should spend on each of three categories: 50% to needs, 30% to wants, and 20% to investing and saving. One advantage of the 50-30-20 budget rule is that it provides clear guidelines for your monthly spending while leaving flexibility to adjust as you continue learning how to budget for your personal circumstances.
  
• Zero-based budget: A zero-based budget is just what it sounds like: you assign every dollar of income a category until you hit zero. That includes all your expense categories: necessities, nonessential spending, investing, saving, and emergency funds. Some people enjoy planning with this level of specificity because it can help you feel in control and be disciplined about paying down debt or saving money. That said, you’ll need to track your spending extra closely to make sure you stay on target.
  
• Pay yourself first method: The pay yourself first budgeting method is oriented toward saving and puts your long-term financial goals at the top of the list of funded categories. Essentially, you begin your budgeting process each month by setting aside money for saving and investment. By prioritizing this part of your budget, you can keep your focus on building wealth; some people find it easier to cut down their spending on unnecessary things when the big picture is top-of-mind. 
  
• Envelope method: The envelope method is a classic approach that allocates the money you have on hand to your expense categories. In the most literal form of this budget, you put physical cash into envelopes marked with categories. Then, when it’s time to spend, you take the cash out of the relevant envelope; when the envelope is empty, your budget for that category is used up for the month. The envelope method is the conceptual basis for a lot of budgeting apps, including the Stash partitions feature.   

Step 6: Set realistic financial goals for yourself and stay motivated

Once you learn how to make a budget, the final step is to put your new budget plan to use. That means tracking your spending regularly, planning out your budget for each month, and readjusting as you learn. 

One of the keys to maintaining a budget is motivation: What are you trying to achieve financially? It could be a goal as modest as saving for a new couch or as ambitious as starting your own business. Keeping your focus on why you’re budgeting, and what you hope to get from it, can help you commit to the process.

Here are some tips to help you establish goals that align with your current financial situation and increase your chances of success:

SMART goal setting

Utilize the SMART framework when setting your financial goals. By making your goals specific, measurable, achievable, relevant, and time-bound, you’ll have a solid foundation for success:

• Specific: Clearly define what you want to achieve. Instead of a vague goal like “save money,” specify an amount or percentage you aim to save.
• Measurable: Make your goals quantifiable. This allows you to track your progress and know when you’ve achieved them.
• Achievable: Set goals that are realistic and within your reach. Consider your income, monthly expenses, and financial obligations when determining what you can reasonably accomplish.
• Relevant: Ensure that your goals are relevant to your financial situation, values, and long-term aspirations.
• Time-bound: Set a deadline for achieving your goals. This provides a sense of urgency and helps you stay focused.

Break goals into smaller milestones

Breaking larger goals into smaller, manageable milestones can make them less overwhelming and more attainable. For instance, if your goal is to save $10,000 for a downpayment on a house, break it down into monthly or quarterly savings targets.

Align Goals with Personal Values and Priorities

Consider your personal values, aspirations, and priorities when setting financial goals. Determine what truly matters to you and what you want to achieve in the long run. Aligning your goals with your values will provide a strong sense of purpose and increase your commitment to following your budget.

Remember, the purpose of setting financial goals is to provide direction, motivation, and a sense of accomplishment. Regularly review and reassess your goals as your financial situation evolves. Stay committed to the process and celebrate your progress along the way.

1/4

Quiz

 

With the 50-30-20 budget, 20% of your income should go to:

Savings

Needs

Bills

Wants

Savings. 50% of this budget goes toward fixed or essential expenses (needs), 30% goes toward variable or flexible expenses (wants), and 20% goes toward savings.

2/4

Quiz

 

True or False: Everyone should use the same budget template.

True

False

False. You should tailor your budget to your life and your needs. If you want to prioritize your savings over your “wants”, that’s up to you!

3/4

Quiz

 

Which of the following would be included in your fixed or essential expenses?

Shopping

Retirement

Rent

Going out to eat

Rent. This expense stays the same month-to-month and is essential.

4/4

Quiz

 

Which of the following is another example of a budget you might use?

The piggy bank budget

The zero-sum budget

The credit card budget

The shoe-string budget

The zero-sum budget. With the zero-sum budget, you give every dollar a job and the objective is to get to $0 every month.

 

Quiz

 

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How to budget for beginners

If planning and tracking your spending is new territory, the steps above will get you started on the right foot. It may be helpful to keep in mind that you don’t have to get every detail correct from the very beginning. Your budget will always be changing to reflect your circumstances, and the more you use it the more accurate it will become. So get started now and give yourself permission to learn as you go.    

The best budget is the one you stick to

Just by deciding to learn how to budget, you’ve taken an important step toward improving your financial well-being. Budgeting will do you the most good if you can make it a lifelong habit, and taking a long-range perspective can allow you some leeway. If you overspend in a category one month, try to figure out whether you’re underestimating how much you need or if you can adjust your habits to spend less. Eventually, you’ll start to get a sense of the difference between what you need and what you want. Even the simplest budget can change your approach to spending,  saving, and investing for the long-term if you’re willing to commit to it over time.  

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Wintertime brings a host of holidays and celebrations, with gift exchanges, holiday meals, and festive gatherings to mark the end of another year. But the merrymaking also comes with the reality of extra costs. In 2023, average holiday spending is estimated to be $1,530 per household for gifts, travel, and entertainment. Without a budget for these expenses, the holiday season can put a strain on your finances, and even lead you into credit card debt. But with a bit of careful planning for holiday expenses, you can craft a holiday budget that ensures you savor the season’s delights without stressing over money.

In this article, we’ll cover:

• Benefits of holiday budgeting
• How to make a holiday budget
• Avoiding debt during the holiday season 
• Tips for saving on holiday expenses
• How to save up for holiday expenses

Benefits of holiday budgeting

No matter what traditions you observe, extra expenses can quickly mount during the holiday season. Creating a budget can help ensure you have money to spend on festivities, start the new year in a solid financial position, and keep stress from souring your celebrations. 

• Ensure your expenses are covered: A holiday budget safeguards the money you need for your regular living expenses and bills, preventing you from unintentionally spending it on holiday extras. 
• Protect your savings and investments: By allocating funds specifically for holiday spending, you can avoid the temptation to dip into your savings or disrupt your investment plans. 
• Avoid going into credit card debt: With a budget, you’re less likely to rely on credit cards which can leave you with high-interest debt lingering long after the holiday season ends.
• Reduce stress: Knowing you have a plan for your holiday spending can lift a weight off your shoulders. A budget removes the guesswork and lets you enjoy the holidays without the nagging worry of overspending.

How to make a holiday budget in 3 steps

The goal of a holiday budget is to allocate a percentage of your income and savings to holiday spending while maintaining enough money for your other financial commitments. If you already have a budget, now’s the time to work holiday expenses into your plans. Be sure to integrate specific line items for things like gifts, travel, and entertainment into your existing budget. 

And if you haven’t yet established a monthly budget, the holidays are an opportune time to start. Making a holiday budget may help you start a long-term budgeting habit. 

1. Define your holiday spending categories

The holidays can bring a wide array of expenses unique to each person’s traditions; without a detailed plan, it’s all too easy to overlook certain costs. To know exactly what you should budget for your holidays, first, determine what your typical holiday spending looks like based on previous years. Then think about what you’re planning to do this year and make a list of all your anticipated expenses.   

A reasonable budget for the holidays depends on the traditions you observe and what’s important to you. Consider planning for these common seasonal purchases:

• Holiday gifts: Think of everyone on your gift list, as well as presents you’ll buy for things like office gift exchanges or Secret Santa gifts if you celebrate Christmas.
• Greeting cards: Be sure to consider the cost of both cards and postage if you’re mailing holiday greetings.
• Dining and groceries: Include the costs of dining out as well as money for extra groceries if you’re hosting gatherings. 
• Entertainment and activities: Check the cost of tickets and entry fees for the events you plan to attend this season. 
• Decorations and attire: Remember to include expenses for replacing worn-out decorations, as well as special clothing you may need for a holiday party.
• Holiday travel: If travel is on your agenda, plan for the cost of tickets and accommodations, and remember additional expenses like travel insurance and pet care while you’re away.
• Charitable donations and tips: Giving back is an important part of the holiday spirit for many people, so budget for donations you want to make and tips for service workers. 

2. Fund your holiday budget

Once you’ve identified the various expenses that the holiday season entails, the next step is to determine how much you’ll need for each and ensure you have the funds set aside. 

• Determine spending limits for each category: Look back at last year’s spending to help gauge what you might need this year. This historical insight can serve as a baseline for setting spending limits for each category of your holiday budget.
• Reduce your expenses: To free up funds for your holiday spending, look for ways to save money on other expenses. You might want to make temporary sacrifices in some areas to make room for holiday purchases. 
• Tap into extra money: If you receive any extra income during the holiday season, such as a bonus from work, you could use it to bolster your holiday budget. You may also want to look for additional sources of money, like old gift cards that still have a balance or picking up a short-term side gig. 
• Take unpaid time off into account:  If you’ll be taking unpaid vacation time for holiday travel or observance of special days, remember to factor the reduction in income into your budget. 

3. Track and control your spending

Amidst the bustle of holiday shopping, it can be easy to lose track of your planned spending limits. By tracking your spending meticulously, you can be sure you don’t blow your holiday budget.  

• Consider a budgeting app: A budgeting app can give you real-time insight into how much you’re spending by automatically tracking every transaction. This constant monitoring can alert you to issues so you can adjust your spending habits before they become a concern.
• Try a mini envelope budget: Envelope budgeting involves allocating cash into different envelopes for each spending category. By using this approach for your holiday expenses, you can physically see what you have left to spend, which can be a powerful deterrent from going over budget.
• Use your debit card, not your credit card: While it’s tempting to defer the cost of your holiday expenses by putting them on your credit card, relying only on your debit card can help you ensure you’re only spending money you have in the bank. If you can find a debit card that offers rewards, all the better.
• Remember the reason for the season: It’s easy to get caught up in the thrill of holiday spending and forget the reason you’re celebrating in the first place. Before you decide on a purchase, reflect on whether it adds meaning and joy to your personal experience of the holidays.  

Don’t let debt put a damper on your holidays

If you defer paying for your holiday expenses, the joy of the season can turn into the stress of lingering debt when the new year dawns. By planning and spending within your means, you can create lasting memories without the worry of paying off debt once the holiday lights dim.

Avoid credit card debt

Credit card debt can be particularly insidious during the holiday season. It’s easy to swipe now and worry later, but this can lead to a significant financial hangover. In 2022, 35% of U.S. consumers found themselves saddled with debt from holiday spending. Credit card debt in particular often carries high interest rates, which can quickly compound, making it harder to pay off in the long run. 

Beware of buy now, pay later offers

Buy now, pay later (BNPL) offers might seem convenient to spread out holiday expenses, but they come with caveats. These plans allow you to purchase items immediately by paying for just a portion of the cost and then paying off the rest in installments. While this can make large purchases seem more manageable, it can also lead to spending beyond your means. If you’re not careful, BNPL plans can accrue interest or fees, and missed payments may impact your credit score. It’s crucial to fully understand the terms and consider whether the long-term costs are worth the short-term convenience.

Tips for saving on holiday expenses

The holiday season doesn’t have to be synonymous with extravagant spending. With a few smart strategies, you can trim your holiday expenses without diminishing the sparkle of your celebrations.

How to save on holiday gifts

• Arrange a gift exchange: Organize a gift exchange among your family or friend group where every individual draws a name. This way, everyone receives something special, and each person only needs to purchase one gift, keeping expenses down. 
• Set spending limits: If you’re exchanging gifts with someone, agree on a spending cap that works for your holiday budget. This way, no one feels pressured to overspend, and everyone can enjoy the spirit of giving without financial stress.
• Give as a group: If you want to present someone with a high-cost gift, consider pooling resources. For example, joining forces with siblings or cousins to buy a collective gift for a parent or grandparent allows for a more substantial present without the full burden falling on one person.
• DIY your gifts: Handmade presents are not only personal and thoughtful, but may also be kinder to your wallet. Crafting or baking homemade gifts can also be a fun event to enjoy with family or friends, adding a low-cost activity to your holiday season.

How to save on other holiday expenses

• Go the potluck route: If you’re hosting a holiday gathering, consider making it a potluck. With each guest contributing a dish, you save money on groceries and add variety to the feast.
• Find free fun: Look for no-cost holiday activities in your community. Free events like tree-lighting ceremonies, holiday markets, and winter festivals can create cherished memories without expensive tickets or entry fees.
• Take inventory of what you have: Before rushing out to buy new decorations or holiday attire, scour your home storage for forgotten holiday treasures. Reusing and repurposing decorations and clothing can save you money while being environmentally conscious too.
• Make your own decorations: Gifts aren’t the only holiday cost that can benefit from a DIY mindset. Find free online tutorials for crafting holiday decor to adorn your home; just be careful not to overspend on supplies. Plus, a decoration-making party can be an inexpensive holiday activity, and could even become a treasured tradition.
• Trim travel expenses: What you should budget for a holiday vacation depends on multiple factors, but how you get there and where you stay are often the two biggest expenses. If you’re flying, research the travel dates with the lowest costs; if you’re driving, maximize fuel efficiency. You might also consider staying with family or going in with others on a short-term rental instead of shelling out for a hotel. If you do opt for a hotel, remember to include the cost of lodging tax in your budget.     

How to save on holiday shopping

November and December are the biggest months of the year for retail businesses. Alluring sales and an onslaught of ads can easily send you into a holiday shopping frenzy that undermines your budget. To avoid being swept up in the fray, go into your shopping excursions with thoughtful strategies to bolster your self-control.

• Avoid impulse buys: Don’t let sales and flashy marketing tempt you into an unplanned spending spree. Remember, retailers are great at creating a sense of urgency for holiday shoppers. Before you head to the store or browse online, make a list, check it twice, and have a plan for sticking to your budget for each item.
• Be prudent with promos:  Promotional emails and texts can alert you to genuine savings, but they might also entice you to buy things you don’t need. If you find that these messages trigger unnecessary spending, consider unsubscribing during the holiday season.
• Treat yourself sparingly: It’s easy to be drawn to items for yourself while shopping for others. Bookmark the things you’re interested in and revisit them after the holidays so you can use gift cards or take advantage of post-holiday sales.
• Watch out for Black Friday and Cyber Monday mania: The days after Thanksgiving have become holidays in and of themselves as stores kick off the holiday shopping season with the promise of huge savings on hot items. While you can find significant discounts, not all deals are as good as they seem, and it’s easy to buy more than you’ve budgeted for in the face of the hubbub. To save money on Black Friday and Cyber Monday, plan your purchases ahead of time, compare prices, and stay focused on the items on your list instead of impulse purchases.  

How to save up for holiday expenses

Setting aside money in advance of the holiday season can alleviate the financial pressure of end-of-year expenses. By saving up for the holidays throughout the year, you’re less likely to feel the pinch when the festive months roll around.

• Start saving early: Start saving up for holiday expenses long before the season starts. A budgeting framework like the 50/30/20 rule can guide you on how much of your paycheck you should regularly put into savings throughout the year. 
• Create a holiday sinking fund: A sinking fund is a dedicated savings pot for a specific goal. Building up a sinking fund specifically for your holiday budget can help you spread the cost of holiday expenses over time, making them more manageable when the season starts.
• Do your holiday shopping all year long: If you identify your holiday expenses early, you can spread your spending out over time. That way you can take advantage of a great deal on a perfect present to stow away for gift-giving time or shop post-holiday sales for discounts on things you’ll want for the following year.     
• Grow your money in an interest-bearing account: Placing your holiday savings in an account that earns interest, such as a money market or high-yield savings account, allows your money to grow through the year. Compounding interest can add a little extra to fund your holiday budget. 

Think beyond your holiday budget

Adhering to a holiday budget is more than just a seasonal discipline; it’s a practice that safeguards your financial health well into the future. When it comes to good money management, planning ahead is key. While you build your holiday budget, consider mapping out January’s expenses as well to give you perspective on the impact your holiday season financial decisions will have on your longer-term savings and investment objectives. With a well-managed holiday budget, you can ensure that the joy of the season transitions seamlessly into a prosperous new year.

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Learning how to make a budget can be an important foundation for working toward your financial goals. There are many strategies that can make it easier to build a budget and manage your money, and envelope budgeting is a popular one. With this simple approach, you group your monthly expenses into categories, or envelopes, and dedicate a specific amount to each one. Then you spend money in each category using either actual envelopes and cold, hard cash or your bank account and debit card. You’ll know you’re at your monthly spending limit for each category when your physical or digital envelope is empty. 

In this article, we’ll cover:

• How envelope budgeting works
• Pros and cons of the envelope system
• Envelope budgeting in 5 steps
• Other budgeting strategies you can try

How envelope budgeting works

The envelope system helps you manage your predictable bills, like rent and car payments, as well as variable expenses, like groceries, entertainment, household goods, and personal care. Simply group your expenses into categories, grab some envelopes, and label each one with a category. When you get paid, put a predetermined amount of cash in each envelope. Spend as needed from each category, but when the cash is gone, you’re done spending until your next paycheck comes.

For example, say you’ve allotted $200 per month for entertainment. The next time you head to a movie with friends, grab your “entertainment” envelope and pay for your tickets and snacks with that cash (or your debit card if you’re using digital envelopes). The amount left in the envelope is your remaining entertainment budget for the month.

Benefits and downsides of the envelope system

Every money management strategy has its pros and cons. While simple and straightforward, the envelope system may not provide the flexibility you need. Let’s take a closer look at the benefits and downsides of envelope budgeting.

Envelope budgeting pros

The envelope method is designed to give you a sense of clarity and control over how you spend your money. For many people, using physical cash makes spending feel more “real” while providing a better understanding of everyday spending habits. And it may even help you spend less on impulse buys.

• What you see is what you can spend: Whatever is left in the envelope is what you can spend for the whole month, so you’re always aware of your limits. That can make unplanned purchases less tempting.
• Using cash may help you spend less: If you’re motivated by little rewards, it’s gratifying to see cash left in your envelopes at the end of the month. And when you see the dollars in your envelope dwindling, you may feel more motivated to keep a close eye on your spending.
• Helps you understand your spending habits: After a few months, the envelope method can help you identify trends in your spending so you can make sensible adjustments to your budget. If your grocery envelope is usually empty before the end of the month but your entertainment envelope tends to have some cash left over, it may be time to reallocate some funds. 
• Can accommodate cash or debit card spending: Envelope budgeting works just as well with cash and real envelopes as it does with a debit card and digital “envelopes.” Various budgeting apps and online banking tools are widely available to help you maintain a cashless envelope system.
• Simple and straightforward: New to budgeting? The envelope method makes it simple to track where your money is going and how quickly you’re spending it. You’ll either have the cash to make a purchase or you won’t. 

Envelope budgeting cons

While envelope budgeting is simple and straightforward, it can get tricky if you need lots of flexibility or share expenses with others.

• Limited flexibility: Simple doesn’t always mean flexible. By setting strict limits on spending in different categories, envelope budgeting can feel restrictive, especially if you struggle to accurately estimate your expenses. 
• Harder to track for more than one person: Sharing expenses with spouses, partners, or kids isn’t unusual, but envelope budgeting may make it more difficult. Tracking how much money is going in and out of envelopes with multiple users can be complicated and time consuming.
• Can be cumbersome if you use cash: Carrying cash in your wallet can be bulky, especially if you’re managing small bills and coins. And certain expenses are harder to pay for in cash; there are even some stores that no longer accept cash payments.
• Complicated to adjust on the fly: If you run out of cash in one of your envelopes and want to immediately reallocate some funds from another category, you’ll need to do some inconvenient shuffling and be careful that you’re not shorting one category too much. 

How to start envelope budgeting in 5 steps

Ready to get started with envelope budgeting? These five steps will show you how.

1. Determine your monthly take-home income

Your most recent pay stub should show you your net income, or the total income you bring home after taxes and any other deductions are subtracted. Write down that number, along with any additional sources of income you might have from things like interest, child support, or side gigs. Your monthly take-home income is the total of all those numbers.

2. Calculate your monthly expenses

Make a list of all your monthly expenses and how much you spend on each one. Include necessities like housing, groceries, utilities, and discretionary spending on things like streaming services and hobbies. Don’t forget about debt repayment and money for savings and investments. 

Variable expenses can be a bit tricky to calculate. For things like groceries, gas, dining out, and other things that change from month to month, take a look at your spending over the last six months and determine your average spending to get a baseline number for planning your budget.

Don’t forget to account for irregular expenses that don’t happen each month, like vehicle maintenance, vet bills, haircuts, or quarterly water bills. For these expenses, you’ll want to determine how much you need to put aside each month so you have the money when you need it. For example, if you spend $90 on an oil change every three months, divide that expense by three and record your monthly oil change expense as $30. 

3. Compare your income and expenses

Now it’s time to see how the numbers line up. Are you making enough to cover your monthly expenses? If not, it’s time to take a closer look at your spending to decide what’s essential and what you could cut from your budget. Shopping around for better prices on things like car insurance and phone plans can also help you trim your spending. You might also consider picking up a side gig if you want to increase your income.

If you’re earning more than you spend, congratulations. Consider putting that surplus into savings, using it to pay off debt, or investing it to work toward your long-term financial goals. 

4. Determine envelope categories and allocate money

Now that you’ve identified all your monthly expenses and know you can cover them with your income, it’s time to create the spending categories that will be your envelopes. This step is where you really define your monthly budget.

Start by grouping your expenses into categories that make sense for you. You might want to get very granular, such as having separate envelopes for entertainment at home, going out to events, and dining at restaurants. Or you may prefer to have one general envelope for entertainment that includes all of those things and more.  

Once you’ve settled on your categories, decide how much money you’ll allocate to each envelope every month based on the spending needs you determined in step one. You may need to adjust this a bit from month to month, such as putting more into your “gifts” envelope when a friend’s birthday is coming up, but the goal is to create a spending plan you can stick to over time. This is also the time to think about your goals and plan accordingly. For instance, if getting out of debt is a priority, you’ll want to allocate more than just your minimum payments to your envelopes for credit cards and loans.

Budgeting tip: one way to make the envelope system a bit more flexible is to have a “miscellaneous” envelope with a bit of money you can dip into if small, unexpected expenses arise. Just be careful not to rely on this envelope too much or you won’t be getting the full benefit of planning and tracking your spending. 

5. Stash your cash or take your envelope system digital

Now it’s time to make those envelopes real. If you’re going the cash route, grab a stack of paper envelopes and start labeling. Then stuff your envelopes and start using that cash to pay your expenses. If you prefer a less tactile approach, create digital envelopes by setting up categories in a budgeting app or your online banking tools and use your debit card to take care of your expenses. 

After you’ve tried envelope budgeting for a few months, you might want to review your spending and make adjustments to your budget. Have you encountered expenses that you forgot to include initially? Are you consistently running out of money early in some categories or winding up with a lot leftover in others? Tweak as necessary to make your envelope system work for your life. 

Other budgeting strategies

There are countless ways to budget, so don’t be afraid to experiment until you find the approach that works best. If you try envelope budgeting and decide it’s not right for you, consider the 50/30/20 rule or the zero-based budgeting system.

The 50/30/20 rule

The 50/30/20 rule is a budgeting guideline that divides your monthly income among three broad categories: 50% to needs, 30% to wants, and 20% to savings/investing. Like the envelope method, this approach can simplify the budget process and make your money management easier by grouping your expenses into categories.

The zero-based budgeting system

The zero-based budgeting system gives every dollar you take home a specific function and leaves you with no unused money at the end of the month. Because every dollar is assigned a specific purpose, it can help reduce impulse spending and allow you to plan your budget very precisely. 

Your wallet, your budget

If you often wonder where your money goes each month or tend to spend more than you’d planned, envelope budgeting can help. When you open your wallet, you can see exactly how much you have left for the month and make choices accordingly. 

The right budgeting strategy can make managing your money less stressful and give you confidence when working toward your goals. Even if you’re a budgeting beginner, don’t worry. You’ve got this.

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A budget can be an indispensable tool in managing your finances. There are many different budgeting methods, and if you’re craving a strong sense of control, the zero-based budgeting strategy may be right up your alley. With this approach, you assign every dollar of your income to a specific budget category, making sure you end up with zero left over for the month. This laser-focused planning can help you control your spending, work toward your long-term goals, and make the most of your money now and in the future.

In this article, we’ll cover:

• How zero-based budgeting works
• Zero-based budgeting pros and cons 
• How to build a zero-based budget in 6 steps
• Zero-based budgeting tips
• Alternatives to zero-based budgeting

How zero-based budgeting works

Think of zero-based budgeting as putting each dollar you earn to work. You give the dollar a job, sending it off to help fund one of your expenses. Some dollars will go toward paying for necessary costs, like rent, utilities, and health insurance. Others will go toward longer-term goals, like going on a trip or buying a home. And some money will be dedicated to discretionary spending, like entertainment or treats. 

For example, if your take-home income each month is $4,500, you’ll plan how you’re going to spend that entire amount on all of your expenses. After allocating the amount you need for necessities, you’ll distribute the rest among categories for discretionary expenses and savings based on your priorities and goals; all those expenses will add up to $4,500. 

The key rule is that every single dollar must be assigned to a specific spending category so that when you subtract your planned expenses from your income for the month, the difference is zero.  

Pros and cons of zero-based budgeting

Zero-based budgeting can be a highly effective method for keeping close track of your spending, but no budget method is for everyone. Here are some pros and cons to keep in mind.

Zero-based budgeting benefits

The zero-based budget method can allow you to gain a deep knowledge of your income, your spending, and how the two relate. By employing the system and sticking to its rules, it’s possible to make better decisions and move more efficiently toward your financial goals. 

• Gives you tight control over your spending: When all your money is assigned to specific categories, you have a clear plan for how you’ll spend it. This precision can help you avoid overspending, impulse buying, and using your money in other ways that don’t align with your priorities.
• Can help you increase savings: Saving for larger purchases, retirement, or other long-term aims calls for consistent contributions over a long period of time. By making saving part of your monthly financial plan, it can be easier to stick to your goals and enjoy the sense of accomplishment that comes from seeing your savings build.
• Provides clarity and control: A zero-based budget requires that you make a detailed plan each month and keep close track of your spending. This process gives you an opportunity to really think through your needs, learn to anticipate expenses more accurately, and see exactly where your money is going. If managing your finances is stressful, you may find that level of control and visibility reassuring. 

Zero-based budgeting downsides

Despite the advantages of zero-based budgeting, it can also pose its own set of challenges. Consider the following before you decide to move forward with this method.

• Can be time-consuming: Not everyone has an abundance of time to focus on their finances. Zero-based budgeting requires an initial investment of time to set up and careful tracking of your income and spending on an ongoing basis. You can relieve some of that burden by using a budgeting app or online banking tools that automatically categorize your spending, but you’ll still need to check in on your budget frequently throughout the month.
• Provides less flexibility: With every single dollar allocated to a specific category, it can be difficult to adapt to an unplanned expense or when the cost of something exceeds what you’d anticipated. Building a rainy-day fund for smaller expenses and an emergency fund for bigger ones can provide the cushion you need to stay on budget. 
• Variable expenses are harder to plan for: Since zero-based budgeting is so precise, costs that change from month to month can make planning more challenging. You can’t predict if gas prices will go up or anticipate your grocery bill down to the penny. The longer you stick to your budget, the better you’ll get at estimating how much money you’ll need for expenses, but it’s better to overestimate and have a bit left over in a category at the end of the month than to find yourself short.   
• Difficult to adapt to variable income: If your income is different each month or you’re paid on an unpredictable schedule, precision planning can be challenging. So freelancers and hourly workers whose schedules fluctuate might struggle with a zero-based budget. You can overcome this by using your previous month’s income for your current month’s expenses, but you’ll need to save up a month’s worth of income before you can put this into action. 

How to build a zero-based budget in 6 steps

If you’re ready to give zero-based budgeting a try, you can get started in just five steps. 

1. Calculate your total monthly income

The first step toward zero-based budgeting is adding up your total monthly income. You’ll need to account for every dollar, so be sure to include any money you take in beyond your paycheck, such as money from a side gig, child support, passive income from investments, payments from government programs, etc. 

2. Identify all your monthly expenses

Once you’ve accounted for the money you make, it’s time to examine your spending. Review your expenses over the last year and take note of what you’ve spent money on, how much you spent, and how often expenses recur. Don’t forget to account for expenses that come up infrequently, like annual magazine subscriptions, quarterly oil changes, and holiday gifts. 

Add up all your monthly expenses to get a sense of how much money you generally spend each month. For periodic expenses, you can calculate how much money they cost on a monthly basis by dividing the total cost by the frequency. For instance, if you pay $600 for your car insurance every six months, that comes out to $100 a month. 

3. Compare money in and money out

Now, compare your total income to your total expenses. If you have excess money, you’ll want to figure out how to put it to good use, such as investing it in one of your long-term savings goals. If you don’t have enough to cover your expenses, you’ll need to adjust your budget until your income and expenses balance out to zero. Ask yourself what you can spend less on or eliminate, look for better deals on services, and consider whether you want to boost your earnings through a side hustle. 

4. Create categories and allocate your income

Now that you understand your income and expenses, you can start to plan for future spending. Create a budget category for each expense. Aim to be detailed enough that you can be precise in your planning and tracking, but not so granular that your budget is cumbersome to use. You might want to group some things together, like having one line item for all your streaming services or combining groceries and take-out meals into one general “food” category. But you might not want to lump all your date nights, happy hours, and movie rentals into a general “entertainment” category; that would make it tricky to really watch your spending.  

This is also the time to think about how you want to spend your money and plan accordingly. Is the amount you usually spend on each category aligned with your goals? Would you want to use your new budget to change the amount you spend on some things? In addition to your common expenses, consider your long-term goals and add these to your budget. These can include getting out of debt, saving toward a big purchase, building your emergency fund, or investing for retirement. 

Once you’ve defined your categories, allocate your income across them for the coming month, ensuring every dollar gets a job and your income minus your expenses equals zero.

5. Set up a system to plan and track your spending

With your newfound understanding of your complete financial picture and a solid plan for the future, the only thing left to do is maintain your budget from month to month. Some people go the DIY route and make a spreadsheet. That’s a simple approach that lets you customize things to your liking, but it does require manually entering all of your expenses on a regular basis. You can also automate the process by using a budgeting app; your online bank account might also have built-in features for creating budget categories and tracking your spending. 

Whether you create your own tracking or use an automated tool, check in on your spending frequently. At least once a week is recommended, but a few times a week or even every day may be helpful when you first get started. Keeping a close eye on money going in and out will ensure you always know how much you can spend on things and help you stick to your budget.  

6. Revisit your budget each month

Zero-based budgeting depends on consistent maintenance. You don’t have to reinvent the wheel each month, but you’ll want to sit down with your budget before the first of each month and make adjustments as needed. For instance, you may need to put a bit more in your “car maintenance” category when you know it’s time for an oil change and less in your “gas bill” line item when the weather starts to warm up.  

In addition, your financial goals can change over time, and what was important to spend money on in January might not be so critical come summer. That’s why it’s important to look at your budget with fresh eyes each month and make sure it still makes sense for your current financial outlook.

Tips for making a zero-based budget work for you

Zero-based budgeting can provide precision in planning for expenses and tracking your spending, but it might not be right for everyone. If you decide to use this system, here are a few tips for ensuring you stay on track.

• Give every dollar a home: Make sure all your money is accounted for once you’ve built your budget. That means pushing leftover funds into your categories (perhaps savings or other long-term goals). If you have extra money at the end of the month, carry that over into the next month as income. For example, if your take-home income is $5,000 a month and you only wind up spending $4,800 one month, you have $200 left over. Include that $200 in your income when you set up your budget for the following month. 
• Make a monthly budgeting date night: It’s important to remain both watchful and adaptable with your zero-based budget. Plan for regular maintenance by setting aside time each month to review your income, expenses, and goals, and set up your specific budget for the coming month.
• Analyze and improve your spending habits: Zero-based budgeting is all about tracking what you’re spending money on and using it to stay on course with your priorities. Use your budgeting date night to reflect on how the previous month went. What categories had money left over? Which ones wound up in the red? If you’re often overspending on something, this is your chance to either adjust your habits or make decisions about what you really want to prioritize. 
• Spend from one bank account: Centralizing your incoming and outgoing transactions in a single checking account can help you more easily keep track of your cash flow. If you have savings as part of your budget, you may want to open a separate high-yield savings account and transfer money into it each month, just like you would pay a bill, but don’t use that account to pay for your expenses.  
• Build up your emergency fund: The zero-based budgeting strategy doesn’t leave you with extra cash to spend on unforeseen expenses. Make sure you’re ready for the unexpected by creating an emergency fund category in your budget and allocating money to it every month. 

Alternatives to zero-based budgeting

There’s no one right way to budget. If you try the zero-based approach for a few months and it’s not working for you, consider whether one of these alternatives may be a better fit.

The 50/30/20 rule

The 50/30/20 rule is a general strategy for budgeting that allocates your income based on three broad categories: 50% goes to pay for your needs, 30% funds your wants, and the remaining 20% is dedicated to savings and investing.

Envelope budgeting 

In envelope budgeting, you allocate money to expense categories by actually placing cash in envelopes. As the month progresses, the amount in each envelope is what you have to spend on that category. This method can also be taken digital by using a budgeting app and debit card.

Is zero-based budgeting right for you?

Learning how to make a budget can be the first step in taking control of your finances in the present and building toward your long-term goals. Zero-based budgeting can be an effective strategy if you want to stay in control of your spending and carefully plan how to make the most of your money. And if you’re new to managing your own finances, this approach could give you useful insights into your spending habits and how to live within your means.  

Whatever budgeting strategy you choose, Stash’s online banking features make it easy to stay on track with customizable expense categories and automatic tools for tracking your spending and building your savings. 

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If you’re carrying a balance on one or more credit cards, you’re not alone: the average American has about $5,733 in credit card debt according to TransUnion’s latest report. Being in debt can be stressful for both your mental and financial health. In addition to negatively impacting your credit score, unchecked credit card debt can leave you drowning in accrued interest, racking up late fees, and struggling to balance your budget. It can be easy to get in over your head with credit card spending, but it can be much harder to figure out how to pay off credit card debt.

However, with some guidance and discipline, it’s possible to overcome these challenges. This guide is designed to help you gain a better understanding of your credit card debt and develop the strategies and motivation you need to pay your debt off faster. With careful planning and discipline, you can take the first step toward your life without credit card debt today and start focusing on your other financial goals sooner.

In this article, we’ll cover:

• Knowing what you owe
• Debt repayment strategies
• Making more and spending less
• Negotiating with creditors
• Staying motivated

Understanding your credit card debt

Taking control of your credit card debt starts with an understanding of your current debt situation. Once you have the full picture, including the amount you owe and your monthly expenses, you can build a budget conducive to getting out of debt. 

Evaluate your current debt situation

Knowing what you owe is the first step to eliminating debt. Whether you’ve accumulated debt on one credit card or ten, start by understanding the total amount of money you owe across all your cards. Then, consider details like interest rates and minimum payments for each credit card. 

Here’s how to get started:

• List all your outstanding balances: Your most current statements show you what you owe on each account. Make a list that includes the name of each card and your outstanding balances.
• Determine your interest rates: The average credit card interest rate as of 2023 is between 23% and 24.5%, which can have a significant impact on how much your debt grows every month. Check the interest rate for each of your cards to help determine how much additional debt you’ll incur each month you carry a balance. Interest rates can vary widely based on the credit card issuer, the individual’s credit score, and other factors.
• Know your minimum monthly payments: List the minimum payments for each account and add them up to determine your total minimum debt payment each month. You’ll need to budget for the minimums to avoid racking up fees, and likely need to pay more than the minimums to eliminate your balance entirely.  

Track your expenses and create a budget

It’s important to know how much money you have coming in and going out each month so you can make a budget. If you don’t already track your expenses, now is the time to start. Analyzing your spending habits can help you identify areas where you might be able to cut back and reallocate funds to debt repayment. Once you understand your habits, you can build a budget that includes plans for paying more than your minimum credit card payments. Online banking tools and budgeting apps are both useful ways to monitor your expenses in real-time and make sure you’re sticking to your budget.

Strategies for debt repayment

Now that you know what you owe and have a monthly budget, it’s time to choose a debt repayment method. Here are three popular strategies to consider.

Debt snowball method

With the debt snowball method, you organize your debts from smallest to largest and dedicate as much of your monthly income as possible toward paying off your smallest debt first. Once that’s paid off in full, you tackle the next-smallest balance. The theory behind this strategy is that you’ll gain confidence and momentum as you pay off these smaller amounts more quickly. The snowball method doesn’t take interest rates into account, just the account balance, so it isn’t always the fastest method for paying off your total debt. But if you’re motivated by small but meaningful victories, the debt snowball method could be right for you.

Debt avalanche method

Unlike the debt snowball strategy, the debt avalanche method is all about interest rates. Start by listing all of your credit card debts by interest rate, from highest to lowest. Then focus on paying off the card with the highest interest rate first, followed by the next highest, and so on until you’re debt-free. It might take longer to pay off one balance entirely with the debt avalanche method, but by eliminating your higher interest rate debt first, you can often save yourself money in the long run. 

Debt consolidation

Debt consolidation rolls all of your credit card bills into one easy-to-manage monthly payment, which can be helpful if you’re carrying a balance on multiple cards. There are a few options available. These include using a debt consolidation service, taking out a personal loan, tapping into your home equity, or using a balance transfer card. In general, debt consolidation could be advantageous if the interest rate on your new card or loan is lower than the rates on your existing cards

Be aware that your credit score could impact the options available to you and the interest rates you can get. In addition, debt consolidation services and balance transfer credit cards often come with fees, so be sure you fully understand all the costs before you go this route. 

Increase your income and reduce expenses

Finding ways to increase your income and reduce your expenses can allow you to put more money toward paying off your credit card debt. And the good news is that there are concrete actions you can take to make it happen.

Generate additional income sources

If it fits in with your current lifestyle, consider exploring a side hustle, like a part-time job, freelancing, or even starting a small business. Start by identifying the skills, talents, and interests you have that could be monetized. Offering freelance services in your area of expertise or taking on gigs like pet sitting or making deliveries could help generate the additional income you need to reduce your credit card debt. Several online platforms and apps offer part-time, hourly, and on-demand work opportunities that can put more cash in your pocket.

Reduce your expenses

Finding ways to save money can give you extra money to put toward eliminating your credit card debt. Review your monthly expenses and prioritize your needs over your wants. What non-essential items or services can you cut back on? Consider finding alternatives to any pricier habits, products, or services. For example, you could cancel your unused subscriptions or commit to cooking and making coffee at home instead of dining out. It may also pay to research competitive rates and leverage your findings to request discounts, promotions, or price negotiations with service providers. If possible, consider using a debit card exclusively to limit your spending to the money you actually have in the bank and avoid incurring more credit card debt. 

Negotiate with creditors

Although it might seem intimidating, it is possible to negotiate with your creditors for lower interest rates or more manageable payment plans. Proactive, honest communication and a friendly attitude can go a long way. You may also consider seeking professional credit counseling to assist you with debt management.

Contacting credit card companies

Many creditors will be open to adjusting how you repay your debt when you’re facing financial difficulties. Approaching your credit card company with transparency about your current financial situation allows them to offer alternative payment options or other assistance. Though this may not work in every case, it’s always worth a try, and you might be surprised by the results. Here are a few tips for successfully negotiating lower interest rates or payment plans:

• Research competitive interest rates and mention them during negotiations.
• Highlight your positive payment history or loyalty to the credit card company.
• Explore balance transfer options to lower interest rates.
• Discuss payment plans with reduced monthly payment options.
• Stay persistent and assertive, but always respectful, on the phone. 

Seeking professional help

Credit counselors are professionals with specialized training in debt, credit,  budgeting, and other financial matters. Not only can they advise you about personal money management, but they can also work on your behalf to arrange debt management plans and lower interest rates. But keep in mind that professional debt counseling services usually aren’t free. So while you may benefit from your credit counselor’s knowledge and negotiation skills, you may be charged for the service. Look for reputable credit counseling businesses by reading reviews online and checking companies’ ratings with the Better Business Bureau. 

Stay motivated and avoid further debt

Remember that paying off your credit card debt is a process, and it may not be a quick one. But you’re not alone on your debt repayment journey: Americans have accumulated over $986 billion in credit card debt, averaging about $2,700 in unpaid balances per person. If you stay focused and motivated, it is possible to become free of credit card debt. Here are some tips to help you stay the course and accomplish your debt repayment goals:

• Set realistic goals and milestones
• Commit to budgeting and tracking your spending
• Celebrate small victories along the way
• Seek support from family, friends, or support groups
• Develop healthy financial habits to prevent future debt accumulation

There is life after credit card debt 

By prioritizing debt repayment today, you can take control of your financial situation and create hope for the future. It may not be the easiest thing you’ve ever done, but it’s likely to be one of the most rewarding.

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Dealing with debt can be overwhelming, especially if you carry multiple balances on credit cards and loans. The debt snowball strategy, a powerful debt-repayment method, offers a clear path toward financial freedom. 

The burden of debt can cause stress, tighten your budget, and hinder your ability to save for the future. However, if you’re grappling with numerous loans and looking for a path to become debt-free, the debt snowball method could be your ideal strategy. It provides not just a blueprint for debt repayment, but a journey that transforms your financial outlook, making the goal of a debt-free life tangible and achievable.

In this article, we’ll cover:

• How the debt snowball strategy works
• An example of the debt snowball strategy
• The debt snowball vs. avalanche method
• Debt snowball method pros and cons

How the debt snowball strategy works

When employing the debt snowball method, you factor in all your debts, including credit cards, auto loans, personal loans, medical debt, student loans, and mortgages. Here’s how it works:

1. Begin with a budget: Create a budget that reflects your monthly income and expenses, including minimum payments on your debts, and look for ways to save money so you can put more toward debt repayment. You might want to try the 50/30/20 budget rule as a starting point 
2. Organize your debts: List your outstanding balances from the smallest to the largest debt. This is the order in which you’ll tackle paying off your debts.
3. Pay off your smallest debt first: Make the minimum payment on all your debts each month, and allocate as much money as possible to making more than the minimum payment on your smallest debt.
4. Pay off one debt, then move to the next: Once you’ve completely paid off your smallest debt, start paying more than the minimum payment on the next-largest account. Put the same amount of money you’d been paying on the smallest debt toward this next one.

Debt snowball strategy example

To illustrate the debt snowball strategy, let’s look at a hypothetical example in which you aim to get out of $30,000 in debt. 

First, break down your outstanding balances, from the smallest debt to the largest debt:

Using the debt snowball method, you would first focus on paying down your smallest debt: credit card #1. Let’s say you can afford to put an extra $75 each month toward getting out of debt. Here’s what your debt payments would look like each month:

1. Credit card #1: $115; ($40 monthly minimum payment plus an extra $75) 
2. Credit card #2: $50 (monthly minimum payment) 
3. Car loan: $100 (monthly minimum payment)  
4. Student loan: $130 (monthly minimum payment) 

Once credit card #1 is paid off, it’s time to tackle credit card #2. Add the total amount you’d been paying toward credit card #1 ($115) to the monthly minimum payment for credit card #2 ($50); you’ll now be paying $165 toward credit card #2 each month. Continue the process until all your debts are paid off.  

Debt snowball vs. avalanche method

The avalanche method is another popular strategy for paying off debt. With this approach, you tackle your debts in order of highest to lowest interest rate in order to minimize your overall interest payments and get out of debt faster. Neither approach is necessarily better; it depends on your particular needs and goals. The avalanche method may help you pay off $30,000 more quickly and save on interest, but the snowball method could be more helpful in keeping you motivated.

Debt snowball pros and cons

As you evaluate methods for getting out of debt, consider the debt snowball method’s advantages and disadvantages.

Advantages of a debt snowball strategy

It can be difficult to stay optimistic when you owe money on multiple accounts. This is where the snowball method can come in handy, providing you with a sense of accomplishment as you progress through your debt payment. 

• Gain confidence and momentum: Completely paying off a debt feels great. Tacking your smallest debts first gives you that feeling more quickly, spurring you on to keep up your efforts. 

• Reduce the number of debts more quickly: By eliminating smaller debts, you’ll have fewer monthly payments, which can reduce stress and make it easier to manage your bills.

• Easy to implement in your budget: Once you figure out how much extra money you can put toward getting out of debt, the snowball method is simple to work into your budget.

Downsides of a debt snowball strategy

While the debt snowball method offers its advantages, it’s important to consider the potential downsides as well. 

• You may pay more interest over time: Prioritizing smaller debts based on balances rather than interest rates means that higher-interest debts may accrue more interest in the long run.

• It may take longer to pay off all your debt: While the snowball method provides psychological benefits, it may not be the most efficient approach for paying off all your debts in the shortest possible timeframe.

Is the debt snowball method right for you?

If you’re still wondering if the debt snowball method could really work for you, consider the following factors. If any of these statements apply to you, you might benefit from this strategy:

• You want a sense of accomplishment and momentum quickly. If quick wins give you the motivation you need to stick with your debt-payoff plans, the snowball method can give you that mental boost.

• You want to reduce the number of debt payments faster. By eliminating smaller debts, you’ll have fewer monthly payments to manage, streamlining your financial management.

• Your debts have close to the same interest rates. When the interest rate differences between your debts are minimal, the snowball method won’t necessarily lead to you paying more in interest over time.

• Your smallest debts have the highest interest rates. If your smallest debts are also your highest-interest debts, the snowball method would allow you to spend less on interest overall in addition to its psychological benefits.

When dealing with debt, a repayment strategy can be critical in climbing out of the hole. Whether you choose the debt snowball method, the debt avalanche method, or another strategy, don’t discount the importance of creating and maintaining a budget. By taking consistent steps and making informed decisions, you can gain control of your money and work towards a debt-free future.

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If you’re wondering how to get out of debt, you’re not alone. Around 64 million Americans have some form of debt. And it’s not just credit card debt keeping people up at night. According to the credit-reporting agency Experian, Americans’ consumer debt adds up to more than $15 trillion. 

While each individual’s circumstances vary, trends show that, on average, Gen Zers hold the least amount of debt, while Gen Xers shoulder the highest debt burden.

For common types of consumer debt, here’s how the average debt owed per consumer breaks down per category.

Debt’s effect on your life

You may have heard references to “good debt” and “bad debt.” Generally speaking, things that may have a long-term positive impact on your financial health are considered “good debt.” That includes student loans, which may increase your long-term earning potential, and mortgages, which can add to your net worth if your home rises in value over time. When people refer to “bad debt,” they often mean things like money you owe on credit cards or an auto loan: purchases that depreciate in value. 

There’s no shame in being in debt, whether it’s the “good” or “bad” type. The difficulty is that carrying debt over time can have a negative effect on your life in a number of ways, such as:

• Cash flow: Monthly debt payments can eat into the money you have available to spend each month. If your minimum payments are particularly high, it can even be difficult to budget for necessities. 
• Credit score: Having a lot of debt or late payments can lower your credit score, making it more difficult to be approved for a loan or line of credit if you need one. Some employers even look at applicants’ credit scores as part of their hiring process. 
• Saving for the future: Every dollar you spend on debt payments and interest is money you can’t put into savings and investments that could help you work toward your long-term goals or save for retirement.
• Risk of falling behind: Even if you have only “good debt,” it can turn bad if you fall behind on payments. Late payments can lower your credit score and result in fees and increased interest rates; it can also be difficult to catch up later.
• Stress: Worrying about debt and finances can take a toll on your mental health as well as your financial well-being. The American Psychological Association reports that 65% of Americans cite money and personal finance concerns as a significant source of stress.   

But the good news is that you can counter the negative effects by learning how to get out of debt, making a plan that works for you, and taking steps now to start your journey toward debt-free living. 

How to pay off your debts faster

Paying off debt takes planning and discipline, but there are techniques you can use to succeed. Depending on the amount you owe and your current financial position, it may take you a longer or shorter amount of time to pay off your debt than another borrower. But regardless of your situation, the sooner you start figuring out how to get out of debt, the sooner you’ll be able to put the money you spend on interest back in your own pocket.

These six tips can help you make a plan and start taking action now:

1. Stop borrowing money 
2. List all your debts
3. Make a budget
4. Negotiate your interest rates
5. Use a debt repayment method
6. Put extra money toward monthly payments

1. Stop borrowing money

Don’t continue to accumulate debt. It may sound obvious, but your spending habits can allow additional debt to creep into your life, sometimes unwittingly. 

You may wish to take a look at how you use credit cards first. Remember that a line of credit is really a type of loan, and you’re paying interest on the money you borrow each time you whip out your card to make a purchase. By using your debit card instead of your credit card, you’ll only be able to spend the money you have in the bank. This may entail reducing spending on non-essential items in your budget, like entertainment. 

Another sneaky way more debt can accumulate is if you routinely use credit cards to earn points or rewards. If you pay off your credit card balance every month, before interest can accumulate, you won’t add to your debt. But it’s easy to spend more than you’d planned and wind up with additional debt if you can’t pay off the full balance when it’s due. 

Review all your auto-payments to see which ones are being charged to credit cards, and switch them to your debit card instead. That way, you won’t be adding to your credit card debt without realizing it. This is also a good opportunity to check for monthly or annual subscriptions you’ve signed up for but are no longer using; it’s easy to start a free trial and forget to cancel it.

Finally, avoid accruing additional debt in the form of loans. If you need to borrow money to make a larger purchase, like a new car or home improvements, consider whether you can delay those purchases.

2. Gather your debts

To plan how to get out of debt, you’ll need a clear picture of exactly how much you owe. Make a list of all of your debts, including student or auto loans, credit card debt, your mortgage, and any purchases you’ve made on installment plans. Track the amount you owe, the interest rate, and your minimum monthly payment for each debt. Having the complete picture will help you better understand how much you’re actually paying toward your debt each month, and whether you’re able to contribute more toward debt that carries a higher interest rate.  

To ensure you track down all your debts, you might want to take a look at:

• your bank account statements for the last year
• your credit card statements
• records in digital payment apps
• your credit report; you can get a free copy of your credit report without negatively impacting your credit score 

3. Adopt a budget that you can stick to

Creating a budget and regularly tracking your spending is a cornerstone of planning how to get out of debt and managing your money to put that plan into action. When you have a budget, you can see exactly how much money you’re bringing in, plan how to spend it, and track where it’s going. You decide what’s essential and what’s optional, giving you the power to make decisions that help you reach your debt-free goals. 

Making a budget is the first step; sticking to it is another matter. Luckily, there are many different budgeting approaches, and you can choose one that fits best with your lifestyle. 

50/30/20 budget

The 50/30/20 model is a popular approach because it provides clear guidelines for allocating your money. With this method, you divide your spending into needs, wants, and savings/debt, then allocate your after-tax earnings to each category.

• 50% to needs: Things you need for survival, like groceries, utilities, minimum loan payments, insurance, and health care
• 30% to wants: Things you want to make life more enjoyable, such as dining out, vacations, entertainment, and just-for-fun purchases
• 20% savings/debt: Savings, investing, and/or making additional payments on your credit card debt and other loans

4. Negotiate and reduce your interest rates

There may be options to reduce your interest rates for some of your debts. The more you’re paying in interest, the longer it’s likely to take to wipe out your debt, so it might be worthwhile to investigate your options.

• Credit card debt consolidation: You might be able to transfer your balance from one or more credit cards to a card with a lower interest rate. Keep in mind that you must be in good standing with your credit card payments and be able to qualify for the new lower-interest card, and there are often fees when you transfer a balance. 
• Credit card interest rate reductions: Some credit card companies have programs for reducing your interest rate. Some issuers might reduce your rate if you have a history of on-time payments or are facing financial hardship. Others have programs designed especially for people whose debt has become unmanageable. 
• Student loan options: Your student loan issuer may have a variety of options for reducing your interest rates, including debt consolidation if you have multiple loans and deferment if you’re facing financial hardship. There are also a variety of federal programs you may qualify for.  
• Other loan options: Any loan issuer might offer programs or be willing to negotiate a lower interest rate, so it’s worth calling to ask.
• Overall debt consolidation: If you have multiple debts, you may wish to research debt consolidation loans. With these programs, the financial institution provides a loan to pay off all your other debts, and then you pay off that single loan. If you go this route, make sure the interest rate on the loan is lower than the rate of all your other debt.  

Be aware that any debt consolidation or interest-rate reduction programs may have fees associated with them, so do the math to ensure any fees don’t outweigh the savings you’ll get by reducing your interest rate. 

5. Tackle your debts with the snowball method

When you have multiple debts, it may feel overwhelming. One approach that can have a big impact is to start small and work your way up: that’s the debt snowball method in a nutshell. Many people find this strategy effective and encouraging when they start their get-out-of-debt journey. 

Here’s how it works: Take your list of debts and organize them by the total amount you owe, from smallest to largest. Every month, make the minimum payment on each account. Then, pay extra on the smallest debt every month. When that’s paid in full, shift all the money you were paying toward that debt to the next largest one, and continue paying the minimum on everything else. 

Here’s a hypothetical example of how it could work in practice. Pat has the following debts:

• Store credit card: $500 balance, $25 minimum payment per month
• Major credit card: $1,200 balance, $65 minimum payment per month
• Car loan: $5,000 balance, $130 minimum payment per month
• Student loan: $15,000 balance, $190 minimum payment per month

Pat pays the minimum payment for all those loans each month, plus an extra $100 toward the store credit card. When the store credit card is paid off, Pat starts paying an extra $125 a month on the major credit card; that’s the total of the store credit card’s $25 minimum payment plus the extra $100. 

One reason this method is so effective is that you gain a sense of accomplishment each time you completely pay off a debt. And the amount you can put toward paying off debt gets bigger and bigger as you go along, just like rolling up a snowball. 

Try the avalanche method for high interest debts

The snowball method isn’t the only approach you could take. People who have some debts with especially high interest rates might want to try the avalanche method, in which you pay extra on the debts with the highest interest rates first. While the easiest method for getting out of debt depends on your situation, what matters is choosing a strategy that works best for you.

6. Pay more than your required minimum payment

The consequences of making only the minimum payment on your debts each month can add up quickly. Say, for example, you have $5,000 in credit card debt, with a minimum payment of $125 and an 18% interest rate. If you only make the minimum payment each month, it will take you nearly four years to pay off your debt, and you’ll spend a total of $2,013.21 in interest. If you up your payment to $300 per month, you’d accrue around $800 in interest and pay off your debt in less than two years. 

Even if you have a fairly low interest rate, the longer you have debt, the more you spend on interest. Putting extra money toward your monthly payment will help you get rid of debt faster, and you’ll pay less in interest as well. 

Your debt-free future

If credit card and loan payments are straining your budget, the tips above can help ease the burden, no matter how small you start. Even if you have relatively little debt now, making a plan for how to get out of debt may be a smart move so that you don’t wind up further in the hole. 

Whether you have “good debt” or “bad debt,” paying it off sooner rather than later can help you build a stronger financial future. When you get rid of debt, you can put the money you were spending on loan payments and interest into savings and investments that may earn profit over time. The institutions that hold your debt are making money from those loans; imagine how much better it would feel to have that money earning interest and returns for you instead.  

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Debt payment FAQ

What is the easiest way to get out of debt?

It depends on your circumstances and personal preferences for managing money. Both the snowball method and the avalanche method can be helpful strategies. Creating and sticking to a budget can help you put more money toward paying off debt and avoid going into more debt in the future. 

What can I do if I can’t pay my debt?

When what you owe is more than you afford to pay back, you can look for ways to reduce your payments by contacting lenders. Depending on the type of debt and the financial institution, you might have options that will reduce your monthly payments or interest rate, or even get a forbearance that pauses your payments for a period of time. 

You can also look into refinancing options for your mortgage or student loans if current interest rates are less than what you’re paying. A similar tactic can be used for credit card debt by transferring your balance to a card with a lower interest rate.

Some people also find that debt consolidation services can help. Institutions that offer a debt consolidation loan sometimes also negotiate with creditors on your behalf to reduce the balance of your debt.

Finally, you might also consider picking up a side hustle to earn extra income that you devote solely to paying off debt.

Can you remove debt without paying?

Generally speaking, once you have debt, you have to pay it off. Even if you declare bankruptcy, you’ll generally have to sell some of your assets to pay back as much of the debt as possible before the rest of the debt is discharged. And certain kinds of debt, like student loans and child support, cannot be discharged through bankruptcy.

That said, there are a few government programs for student loan forgiveness that apply to certain individuals and circumstances.

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