That question may seem easy-breezy but, how much do we really need in our bank account? Many of us have been working for years, yet only some of us can confidently say that our budgeting is consistently successful. We all have different budgeting styles and we always choose what works for us.
It all boils down to us! What are our daily spending needs (or wants)? What are our long-term savings/investing goals? What bills do we have to pay? How about our emergency fund?
These and a lot more are considered subdividing the budget. Yes! The biggest factor is – your budget.
Here are some budgeting strategies that may be considered:
″Pay Yourself First″ Budgeting
This budgeting style is most common for people in their early 20s. When we get that first paycheck from our very first job, surely treats will be coming our way.
Some young adults still choose to stay at home with mom and dad, so bills are minimal to none, leaving lots of potential money to go towards saving and investing. This budgeting style requires less planning, making it convenient for those who are earning more than their financial needs.
On the other hand, some of us choose to first allocate income towards long-term goals such as stocking up your emergency fund or a retirement plan. Getting insurance (home, life, health) is also a solid way to make sure you’re protected, even if young adults tend not to think of this or need it (you can be covered under your parent’s health insurance until 25).
Once your goal has been set, the budget has to be kept! You’re investing in your future, living on what is left in the budget at present.
Envelope Budgeting System
It may seem a bit old school, but this budgeting style is simple and easy to manage. You simply cash out each paycheck that you get, and then ready different envelopes to store your budgeted money in. Each envelope is labeled towards different categories like food, rent, transportation, insurance, etc.
Add to the envelopes the amount of cash allocated for each category and make sure to stick and spend within the budget. This was my first step in budgeting after college, and I would actually keep tabs on money going in and out of the envelope, by writing small notes on the front side of the envelope.
Avoid moving cash around from one envelope for another. It’s very tempting, but control your spending and allow your creativity to stretch the budget in other ways. This form of discipline will keep us away from overspending but will keep us on track with our life goals. So when going out, always keep in mind to never, e-v-e-r, leave our envelopes behind.
Zero Based Balance Budget
For those of us who want a more relaxed and flexible budgeting system, this is a good budgeting system. This set-up allows us to monitor and balance our income and expenses.
Consider a three month period. After carefully monitoring your income and expenses for the last three months, you’ll have an idea of where the money is needed the most. Next is we build the categories e.g. mortgage, insurance, groceries, restaurant meals, gas, and so on.
We have to make sure that our needs, wants and even payables along with our saving or investment goals are included. This system can give us enough room to adjust and customize our budget but requires consistent and close monitoring of each spending to balance things out.
This may not be recommendable to those without fixed income, since the listed previous 3-month allocations may not all apply to the present/future income.
Checking and Savings Accounts
Splitting the money between checking and savings accounts will depend on our purpose. A checking account is a way to keep our money safe and is most convenient to pay the bills and transactions.
There’s an option to have a separate account for the bills and the other for spending. With this easy access, it can either aid in controlling the overspending or be more tempting to overspend.
A clear con is, according to the FDIC, the average interest rate for a checking account is only 0.06%. Also, keep in mind any bank fees and requirements. Banks would require a minimum balance, or you’ll get hit with a fee.
The savings account is where our money can grow, even if it’s at a modest rate. Most online-only banks yield around a 1% annual rate on savings, some can go even higher at 2-3% (but make sure to read all requirements).
Is it necessary to have a checking account buffer?
Again, the amount we put into our checking account depends on how much we earn, how much we spend, and how much we want to set aside.
If your monthly expenses tend to be around $800, try to have a buffer of maybe $200 so that any last-minute expenses are not paid for from your savings account. I try to keep my checking account at $1000 at all times. Having a buffer will let the savings be left untouched and our emergency fund is still intact.
What is an Emergency Fund?
Before any retirement goals or other investments, we must tuck away a portion of our savings as our emergency fund. Unfortunate events may come unexpected and having the right mindset and being prepared for such situations, especially those that may result in possible financial troubles, can aid in our stability and security.
While experts differ in the figure, most recommend having an emergency fund between a 3-month to an 8-month worth of living expenses. Some say to work your way up all the way to a year to have maximum safety of mind that you have a good enough buffer for any emergencies. It’s most important that the fund is readily accessible whenever needed.
These strategies may differ in some ways, but they all aim for one goal: to save.
Here are some tips on how to save money.
Identify the budget
Setting priorities through budgeting can help balance our income and expenses. It’s important to recognize our must-haves and can-have-later so we can cut back unnecessary expenses and save ourselves some money.
Keep track of expenses
This activity is as simple as logging and categorizing. When we figure out where we spend our money the most, and let’s say we realize that it was more on clothing, or dining out, or even just for our online app subscriptions, we can adjust and make changes to our budget which can lead to more savings.
We must make sure to keep receipts, bank statements, and records so we can be more accurate and achieve a good comparison. For those of us who don’t like drafting notes, we can utilize online or mobile apps that can make tracking easier.
Pay down debts, especially that credit card bill
Interest charges and late-payment fees can be avoided if we pay on time. Delaying payments will just eventually lead to more debts especially if we spend more than our income. Good thing is that there are rewards or cash-back programs now that we can claim and turn into savings.
If you’re the type who feels that a credit card isn’t good for you, follow that instinct and withdraw only the cash needed for the week and stick to it.
Set savings goals
Setting ourselves on a certain goal, for example, a vacation, will be more motivating to achieve our target savings. We can start off with short-term goals e.g., vacation, a mini-reunion, a special birthday party since these little wins will drive us to save more for our reserved long-term goals.
If we begin to feel successful at saving, we will more likely want to do it over again, until saving becomes a part of our routine.
Manage those impulses
It may be hardly unavoidable especially after a difficult day at work to not eat out with friends, or maybe go shopping after a week full of deadlines, but controlling those impulses will set the mood for self-discipline.
Rewarding ourselves is fine and advisable, but getting carried away may divert your willpower to save on spending unnecessary purchases. Think about it for a couple of minutes, or even overnight before you decide. Taking time will help you come up with better decisions.
Enjoy and modify the budget
Our budgeting may work out well during the first few months, but in the long run, we will be able to identify categories where we can actually save more. Example would be that frequent spending on restaurant meals. Why don’t we plan our meals ahead instead? That way, we can reduce the expenses while opting for a healthier and budget-friendly option.
If the gasoline or transportation takes an excess on its usual budget, we can rise early and opt for those short morning walks, right? Learning how to adjust and having the willingness to do adjustments will develop our flexibility even if problems arise and will keep us on track with our future plans.
It may seem challenging at first but small steps can make big changes. What is most important is we know what our goals are and we do our best to keep up.
When it comes to our hard-earned money, it is always our own decision, and choosing wisely and weighing options with listed pros and cons will surely put us at a secure and stable point.