Discover the Financial Freedom of Budgeting

Why It Matters:

  • Budgeting helps you prioritize paying off debt.
  • A budget can actually be financially freeing, not restrictive.
  • You can cut costs in some areas to spend more in others.

Kastle Waserman tkc.profilePicture Written by: Kastle Waserman | Transamerica
Dec. 06, 2018

5 Min readClock Icon

When you’re in the throes of mid-life, it can seem like life is happening so fast. You might be working full-time, getting married, becoming a homeowner, or a new parent. It can be easy to forget about the debts you’re racking up and the saving and investing you’re supposed to be doing. But at some point, your finances need some attention to make sure you’re striking the right balance. Although budgeting may sound like a daunting task in the midst of all this “adulting,” it can simplify your finances and help you start to get those big debts out of the way.

Here are some budget basics to help you get into the proper mindset:

Set a goal

What do you need your money to do: Pay off multiple debts such as a mortgage, student loan, and credit cards? You might also want to use it for something fun such as a long vacation, a kitchen remodel, or even just a fancy pair of designer shoes. A goal gives you something to work toward, keeps you on track, and lets you dream a little.

Figure out the logistics

A budget won’t work unless you write it down and track progress, so pick a way that works for you. There are lots of apps out there now that can help. You can keep it simple with a spreadsheet on your computer, or put good ol’ pencil to paper. You can even get a little creative, like a scoreboard on your wall to help you see where you are and celebrate those little achievements – like paying off a credit card!

Break it down

Next, you need to see where your money is currently going. List everything you pay for on a regular basis – bills (including debt/loan payments), food, health care, haircuts, pet supplies. Don’t forget the little things like those subscriptions on auto-pay you don’t see. A quick review of your credit and debit card statements can help remind you of what you’ve bought.

Now categorize incoming money, your paycheck, any money you earn from a side hustle, interest, and dividends on savings and investments.

This will help you see how much money you have going out compared to what you bring in. The remaining funds can be used to add to your savings, do some updates to your house, or buy one of the dreamy items on your wish list.

An easy worksheet

If you need some help laying it all out or you just can’t deal with the math, we created a budget worksheet that will calculate it for you. Based on the Elizabeth Warren method of 50/30/20,1 the worksheet separates outgoing needs, wants, and savings and subtracts it from your monthly income. We organized the worksheet by life stages: college, mid-life, and retirement, so pick the category that best describes you.

Rebalancing act

Once you know what money is flowing in and out, you can rebalance. If your goal is a two-week tropical vacation, what expenses can you cut to free up some funds to put toward that? Think about unused subscriptions, lunches out, any little extras or impulse buys you may not need and won’t miss. Put anything you trim into a separate account that you plan to spend on that goal.

If there is just absolutely nothing left to cut, what can you do to bring in more money? Is there a part-time job available in the evenings and/or on weekends, such as working in a retail store or driving for a rideshare company? Could you attend online or evening classes to build your skill set and position yourself to seek a higher-paying job?

How to prioritize debt

One of your goals may be to pay off debt, but if you have several debts on your outgoing bills list — a student loan, car loan, and that credit card you used for those big ticket emergencies — how do you get out of debt faster than just paying the minimum on each?

One way to tackle it is called the debt avalanche method.2 List out those loans by interest rate. Focus on the one that has the highest interest rate first, since that’s the one that will cost you the most to pay off in the long run. Add more cash to your monthly payment on that one (see rebalancing above) and keep paying the minimum on the others. Once it’s paid off, apply that monthly payment to the next loan on top of the regular minimum you’ve been paying until that one is paid off, and so on.

If you feel like you’ll never get to your smaller debts because you’re paying on a big, long-term one first, you can go for the debt snowball approach,3 paying off the smallest debt first, no matter what the interest rate is. This may give you a feeling of accomplishment by being able to cross those lower debts off faster.

If you are really in the hole with debt and it just feels too overwhelming to tackle by yourself, it’s time to consult with a financial professional. Be aware that they do charge for their services, so make sure you aren’t adding on more debt you won’t be able to pay. But they can help you put together a big picture strategy and get you in good long-term financial shape.

Another place to turn is a consulting service such as the National Foundation for Credit Counseling,4 a non-profit organization which refers you to a certified credit counselor for a free advice session based on your situation. These counselors can then recommend programs (for a fee) on topics such as debt management, financial education, and bankruptcy that may be able to help.

The ultimate priority

Let’s also be clear, you are the priority here. Did you see the 20% section for savings on the budget worksheet? That’s for you. Yes, you want to pay off debts and maybe you have a goal to pay your kid’s college tuition, but you need to take care of you first. Nobody can predict what the future holds. But one thing is for sure, it will require money. And in the years you are no longer willing or able to work, you will need money. So make sure you are putting away a percentage from each paycheck into a retirement investment account.

An emergency savings is also a priority. Things will happen – you may lose your job, your car might break down, a health issue could strike. It’s not a matter of if but when some big expense is going to come along, and you’re going to need a big chunk of money to keep you from going into debt to cover it. So also make sure you have a least six months’ worth of living expenses in the bank and at the ready. If you don’t have it yet, add a regular “payment” into your budget until you have it saved.

The big payoff

By setting a household budget, you’ll have a better handle on what money you have, where it’s going, and where you can find those extra dollars to fulfill your big dreams and goals without depriving yourself. So download your budget worksheet and get started today!

Things to Consider:

  • Start a budget to be able to pay off debt and live how you want.
  • Set goals and find extra money to put toward them.
  • Make yourself a priority with proper emergency savings and retirement investing.

1 “The 50/30/20 Rule of Thumb for Budgeting,” The Balance, August 2018 https://www.thebalance.com/the-50-30-20-rule-of-thumb-453922

2 “How to Use Debt Avalanche,” NerdWallet, February 2018 https://www.nerdwallet.com/blog/finance/what-is-a-debt-avalanche/

3“How to Use Debt Snowball,” NerdWallet, February, 2018 https://www.nerdwallet.com/blog/finance/what-is-a-debt-snowball/

4National Foundation for Credit Counseling https://www.nfcc.org/

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