Living on a budget requires discipline and a degree of sacrifice, but with the right guidance you can make the most out of your income and still have a fulfilling life.
You will need to calculate your expenses and plan your life around these numbers, but doing this can help you balance your finances in both the short and long term—giving you a more stable life, whatever the figure on your payslip.
The first step, experts agree, is to calculate how much money you have left after tax each month. Once you know, there are some smart ways to organize and prioritize your spending.
What Is Budgeting and Why Is It Important?
Kavita Kamdar, executive director of community and business development at JP Morgan Chase in New York, explains that budgeting simply means creating a plan based on calculations of your income and expenses, helping you to keep track of your finances.
The ability to budget is useful whatever your age and career stage. "Whether you're just starting out or a seasoned professional, budgeting can benefit everyone at all life stages. Think of budgeting as the building blocks for greater financial health," said Kamdar.
How to Manage Your Income: Budgeting Techniques and Tips From Experts
Ashley Tran, assistant branch leader at Fidelity Investments in Tampa Bay, Florida, recommends the 50/15/5 method to organize your spending and savings.
As Tran explains, 50 percent of your after-tax income should go to essentials such as rent, utilities, health insurance and groceries. After paying those unavoidable bills, you'll still have half your budget available, but it's important to think ahead. Whatever your age, you should be contributing to your retirement fund.
Tran suggests putting away 15 percent of your pre-tax income to fund your retirement. If you're in your twenties, this may sound like a high percentage but you need to be prepared for a lengthy retirement. Although average life expectancy in the U.S. fell in 2020, as a result of COVID-19, the long-term trend is upward for men and women.
Another 5 percent—at least—of your income should be placed in an emergency fund, so you can cope with unexpected expenses without going into debt.
The remaining 30 percent is for you and your non-essential needs such as vacations, dining out and self-care—particularly after we were denied such treats during the pandemic.
Kamdar said: "An important key to managing your budget is to understand where you stand with your money by knowing what comes and goes each month, thus any disposable income you may have."
Once you know this, you can set your budget and start building a safety net. "An emergency fund can provide peace of mind to help with life's unexpected surprises," she said.
Kamdar advises people to put a plan in place and be intentional about money decisions. She also recommends re-evaluating your budget frequently to see if new trends appear or if you need to make adjustments. Your financial plan should evolve as your life does.
Mauricio Vaca, a certified financial planner in Denver who works as a senior adviser and private client group manager at Personal Capital, advises focusing on savings and investments.
He told Newsweek that a great place to start is by setting up automatic contributions into a 401k employee retirement plan. "Outside of a 401k, a few other great places to start saving in are individual retirement accounts, Roth IRAs and health savings accounts, due to their tax advantages."
Vaca believes investing is the best way to allocate your money, but that will depend on how you feel about risk.
"Someone that is younger and has a higher risk tolerance can tilt their portfolio towards equities, whereas someone that may be nearing retirement, doesn't have a high-risk tolerance or [doesn't have] the ability to take on as much risk due to their age may need to tilt their portfolio towards fixed-income investments."
He suggests using low-cost funds and diversifying your portfolio so that you aren't invested in only one part of the market.
Before you get started, you need to understand the difference between trading and investing so you can define your investment strategy—and stay disciplined about it. "Trading is typically speculative with a shorter time horizon. Investing should be less speculative with a longer time horizon," Vaca said.
Ken Fisher, founder, executive chairman and co-chief investment officer of Fisher Investments, believes there's no magic trick to budgeting and it's all about discipline.
His advice is simple. "Save, save, save. Save now, save heavy, keep saving, and invest passively via the S&P 500 in the stock market and don't touch it until you're old and need to pull money out to spend," he said.
Passive investing means holding investments for a long time, minimizing buying and selling. According to Fisher, you should not "wiggle around" with your pot, but keep it on a steady path.
He added: "If you want to get fancy and try cute, tricky things, don't. If you think you're smarter than everyone else, you're not. If you want an easy outcome, you will end up old and poor."
What Is Zero-Based Budgeting?
Kamdar describes zero-based budgeting as the allocation of all your income to specific categories until there's no money left—as in the 50/15/5 method outlined above.
This approach is great at preventing you from spending what you don't have, she said, but there are plenty more budgeting techniques. If a zero-based plan is not for you, look for one that suits your needs better.
Kamdar added: "As long as you're tracking, being proactive and putting forth the effort, that's a huge first step."
Are Budgeting Apps Worth It?
Budgeting apps often promise to simplify your life and make your calculations easy. But do they really work?
According to Kamdar, digital banking and budgeting apps can help you take control of your finances, allowing you to view your current financial situation in one click. "Budgeting apps and digital banking make things easier, so why not take advantage of them?" she said.
Tran has a somewhat different view. She said: "While budgeting apps can be a helpful tool in getting started, we've found that many people tend to prefer guidelines, which provide structure, but also flexibility to adjust. This allows you to customize to better fit your budgeting methods and behaviors, ultimately helping you stick with your budget over the long term."
Extra Tips
If you are looking for ways to reduce your spending, Tran suggests trimming recurring expenses such as monthly subscriptions and memberships that you don't use regularly.
"There are also ways to make small changes to your day-to-day routine to save up that extra cash like cutting back on the amount of electricity or energy you are using, or cooking more meals at home. These small changes can add up over time!"
If you're getting into investing, Vaca recommends reading books and articles and listening to podcasts about the subject. "Build a strong foundation so that as your accounts grow you have a better understanding of how they're invested, the tax impacts, the risks you are taking."
The content of this article is for informational purposes only and does not constitute financial or investment advice. It's important to perform your own research and consider seeking advice from an independent financial professional before making any investment decisions.
