Budget Breakdown Calculator
This handy calculator can create a line-by-line budget for your expenses. First enter your net income for a given period of time. Press CALCULATE, and you’ll instantly see a thorough breakdown of the amount of money you can earmark for specific expenditures, such as housing, transportation, food, and clothing – on both the low and high end.
These estimates are based on advice from Dave Ramsey, in his Financial Peace book. The estimates are only a starting point and will change dramatically based on your income level and where you live.
Today's Savings Rates
The following table shows current rates for savings accounts, interst bearing checking accounts, CDs, and money market accounts. Use the filters at the top to set your initial deposit amount and your selected products.
How to Set and Stick to a Budget
Have you ever looked at your bank account balance and wondered where all your hard-earned money goes? If so, it's probably a safe bet that you don't budget. While the word "budget" may make you cringe, it is the single best tool to break the nerve-wracking cycle of living paycheck to paycheck. A sound, sustainable budget can fast-track your financial goals, whether that means paying off a credit card, saving for a new car, or planning for a comfortable retirement.
Budgeting is a lot like dieting in that most people know exactly how to create a plan; it's executing that plan that is the real challenge. As with a weight-loss program, consistency is key to budgeting successfully. Realistic goals and the right tools and strategies will help you stick with the budget you create. In the following guide, we will walk you through seven simple steps that will help you develop and follow a budget that will move you toward your financial goals.
Step 1: Find out Where Your Money Goes
Track Spending for One Month
To set realistic budgetary goals, you first need to know how and how much you're spending. One of the most common budgeting pitfalls is setting overly ascetic spending limits only to abandon the budget completely after a short time. You set yourself up for failure by setting goals uninformed by reality, so track first and set goals second. For 30 days, record every penny you spend, from vending machine purchases to credit card interest to rent.
Use the Right Tools
While you can track your spending manually, technology can make the task much less onerous. Here are several ways you can record your expenses:
- Receipts and a notebook. Unless you want to be the person obsessively jotting numbers down in a notebook at every cash register, you'll need to save receipts to track your spending the old-fashioned way -- paper and pen. Write down every purchase you make and bill you pay, and add up your expenses at the end of each day. You might want to categorize each expense, as well (e.g., food, transportation, housing, entertainment, etc.).
- Spreadsheets. You'll still need receipts to track your spending with spreadsheets, but the benefit of programs like Excel is that they do the math for you. You can easily total your expenditures and deduct them from your checking account balance to show what you have left. This method is safer than the pen-and-paper method since you can password protect the file and don't have to worry about misplacing it.
- Budgeting software. Financial software, like Quicken and Microsoft Money, can do even more for you than spreadsheets. Although these programs are sometimes expensive, they offer features like financial goal-tracking, visual graphs of your spending, and bank account and investment management.
Step 2: Pay Yourself First
Make Saving a Priority
Unless saving is your number-one priority and the first "bill" you pay each month, it's unlikely that you will ever find room in your budget for it. If you're not sold on the importance of savings, consider the following benefits:
- Avoid debt. When unexpected expenses strike, savings prevent you from having to rack up costly payday loans or credit card debt just to make ends meet.
- Make major purchases possible. If becoming a homeowner is a dream of yours, it will be hard to come up with the requisite down payment of 10-20 percent without saving consistently. Likewise, when it's time for a new car, using your savings for a substantial down payment will drastically reduce the amount of interest you'll end up paying on your car loan.
- Have some fun. Saving money is not all drudgery; you can also save for fun, short-term goals. For example, you might reward yourself for meeting your savings goals by devoting a portion to that cruise you've always wanted to take.
Make Saving Automatic
Saving is much easier if you never see the money in the first place, which is what setting up direct deposit into a savings account can do for you. With direct deposit, your bank will automatically send a certain percentage of every paycheck -- aim for 10-15 percent -- to your savings account. That way, the money never appears in your checking account for spending.
For short-term savings goals, such as a down payment on a car, a basic savings or money market account is ideal. Money market accounts tend to yield more interest than savings accounts but typically require a higher minimum balance. For longer-term goals, consider tools like certificates of deposit (CDs), which yield even higher interest rates in exchange for the promise that you won't withdraw the money for a specified period of time.
Step 3: Limit Spending and Set Priorities
Review Spending Report
Now that your savings plan is in order, look at your 30-day spending report from step 1. Compare how much you earned versus how much you spent. If you came out ahead, you're doing well but can probably still identify opportunities to save. If you spent more than you earned, take a close look at your spending behavior. Add up what you spent in each expense category to identify areas of overspending. For example, if your food expenses seem high, count how many times you ate out, got coffee to go, bought alcohol, etc. to see how you could save.
Set Realistic Limits
Setting unrealistic limits on your spending will only sabotage your budget. Try to curb your spending gradually to see what limits are sustainable. For instance, instead of trying to eliminate entertainment expenses, aim instead to reduce them by 30 percent.
As far as what percentage of your income you should allocate to various expenses, there are no hard and fast numbers. While experts might recommend that you spend no more than 35 percent of your budget on housing, for example, you might live in a large city where rents are high and command more of your income. In general, you can use the 50/20/30 rule to help you prioritize:
- 50 percent toward fixed costs. Fixed costs are expenses that don't vary and that you must pay every month. Rent, student loans, car payments, utilities, gym memberships, Netflix, and tuition all fall into this category.
- 20 percent toward financial goals. Your goals might include paying off high-interest debt, saving for retirement, or creating an emergency fund.
- 30 percent toward discretionary spending. Flexible spending includes things like groceries, gas, eating out, entertainment, hobbies, and so on.
Step 4: Avoid Plastic Whenever Possible
Obviously, you should avoid credit cards if you're trying to stick to a budget, but that same principle applies to debit cards. Shunning plastic altogether is a sound strategy if you want to rein in your spending. You probably know from first-hand experience that spending with cash feels more "real" than handing over a credit or debit card, and research corroborates this phenomenon. A 2008 study in the Journal of Experimental Psychology: Applied found that "The more transparent the payment outflow [i.e., when you actually see money leaving your hand], the greater the aversion to spending."
You can break your addiction to plastic in several ways. First, try not carrying your credit cards with you and keeping them in an inconvenient place. Second, if you find the temptation is still too great, consider cutting up your cards or closing the accounts. Keep in mind though, that closing the accounts might adversely affect your credit. Finally, if you're too uncomfortable carrying cash, consider buying a prepaid debit card instead. Refill the card every week or month with what your discretionary spending limit is, and stop spending when the funds run out.
Step 5: Prioritize Costly Debt
Financial experts deem debt "bad" if the interest rate exceeds what you could earn after taxes by investing the money. You want to pay this kind of debt, usually credit card debt, off as soon as possible. By contrast, "good" debt is that which has a lower interest rate than you could earn by investing the money, typically student loan and mortgage debt.
To give you an idea of how much credit card debt ends up costing you, imagine you max out a credit card with a $1,000 limit and an APR of 18 percent. Paying only the minimum payment, it will take you 12 years to pay the card off, and you will have paid $1,115 in interest. That means the debt will end up costing you twice what you spent on the card.
High-interest debt is a dream killer, so make it your top discretionary spending priority. You might even want to lower your savings percentage until you rid yourself of high-interest debt. If you qualify, low or no-interest balance transfers are a helpful tool to minimize interest while you work on paying down the principal. Just be sure to pay off or transfer the balance before the introductory interest rate expires. Alternatively, you might consider a low-interest debt consolidation loan to roll all your credit card debt into one manageable loan.
Step 6: Start Creating an Emergency Fund
The Importance of Expecting the Unexpected
Financial experts recommend saving enough to cover six months of living expenses, yet nearly one in three households doesn't have enough for three months of expenses according to the Corporation for Enterprise Development. The danger of living paycheck to paycheck is that you are potentially one mishap from financial ruin. Without a cushion, unexpected major expenses can force you into high-interest debt or, even worse, bankruptcy.
The question is not if financial emergencies will arise, but when. Cars break down, dogs get sick, children get injured -- the list of unfortunate events that can assail your bank account is endless. An emergency fund can help you temper the financial sting of these unpleasant surprises. Moreover, emergency funds give you flexibility and choices. For example, say you wanted to switch careers. An emergency fund would give you the flexibility to withstand a few months of unemployment while you explore your options.
How to Build a Financial Cushion
Ideally, your emergency fund should cover four to seven months of expenses. Remember that you're not replacing your whole monthly income with this fund; you just need enough to pay your bills. Figure out what that number would be. If the figure seems daunting, try starting small. Make a goal to save $1,000 first and work your way up. Keep your fund in an account that is accessible but not to the point that you're tempted to make unnecessary withdrawals. Treat what you commit to your emergency fund monthly like a bill, so you don't miss payments.
Step 7: Maintenance
While you can't modify your budget to accommodate your every whim, remember that sustainable budgets are works in progress. Your income and expenses will change over time and so should your budget. If you exceed your limits in certain expense categories despite your best efforts, see if you can afford to raise the limit by either supplementing your income or cutting spending somewhere else. The key is to make a budget that is not only sensible and goal-oriented, but also easy to stick to.
In addition to evaluating your spending limits, revisit your budget regularly to continue to spot areas where you can save. Here are just a few suggestions you might consider to make room in future budgets:
- Raise your insurance deductibles to lower premiums. Never raise them higher than you can afford to pay out-of-pocket comfortably, however.
- Switch providers. Comparison shop for cell phone plans and cable packages to ensure you're getting the lowest rates.
- Keep your credit score up. Paying your bills on time and paying down debt will help you boost your credit score, which in turn will mean lower interest rates, insurance premiums, and security deposits.
Developing a budget is the easy part -- it's as simple as tracking your spending, crunching the numbers, and setting goals and limits. The part that takes discipline is staying on track. By following these seven steps, you can develop and adhere to a budget that is realistic and sustainable. Creating a budget with these guidelines will set you up for success, moving you toward the financial future you've always wanted.
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