While 2020 has definitely taken its toll on household budgets across the country, recent data shows that 2021 isn’t good for our finances either. In fact, recent data from the Federal Reserve Bank of New York showed that total household debt increased by $ 286 billion to $ 15.24 trillion in the third quarter of 2021. This balance is now higher. from $ 1.1 trillion to what it was at the end of 2019, and it’s also $ 890 billion more than in the third quarter of 2020.
Much of this debt is mortgage balances, which fall into a different category from other forms of debt because they are secured by home values. However, data revealed that credit card balances increased by $ 17 billion, even though they are still lower than they were at the end of 2019. Auto loan balances increased by $ 28 billion. in the third quarter and student loan debt increased by $ 14 billion.
“In total, balances excluding housing increased by $ 61 billion, with gains on all types of debt,” noted the institution.
Five budgeting strategies to try in 2022
If you find yourself with high debt levels that extend far beyond a mortgage at the end of the year, you might be wondering if it’s time to turn a new leaf. Fortunately, there are many proven budgeting methods that can help you start hitting your financial goals, whether you need to save an emergency fund or start cutting your unruly credit card bills.
If you’re heading into 2022 with a ‘new year, new me’ philosophy, here are five budgeting strategies that have the power to transform your finances.
Envelope budgeting works just as it would. You start the process by determining how much money you want to spend in discretionary categories such as groceries, restaurants, clothing, and miscellaneous purchases, and you place the money in separate envelopes designed for different types of spending.
If you wanted to spend $ 800 on groceries, $ 300 on gas, $ 150 on clothing, and $ 100 on miscellaneous purchases, for example, you would use four envelopes per month with the designated amount of money in each. From there, you’d spend the balances on purchases that fall into each category, saving receipts along the way. Once the money is gone in a given envelope, it is gone.
Of course, you can’t pay off your mortgage or car with cash in an envelope. This strategy only requires you to use cash and envelopes in discretionary categories where you can spend more or less in a given month. In the meantime, you would pay the rest of your bills as you normally would.
The advantage of budgeting by envelope is that you set a specific amount of money in various categories and stop spending when it runs out. It can help you stay on track with your spending limits and avoid accidentally spending with a credit card or debit card. In the meantime, setting spending limits can also free up money you can spend on other goals, such as paying down debt.
Zero-based budgeting is another strategy to consider, and it’s a strategy that tends to work well for people with serious financial goals on the horizon. With zero-based budgeting, families sit down to determine how much they are making in a single month. After putting that number in one column, they add up all their required expenses and bills in another category.
If someone brings in $ 7,000 a month and their total bills and expenses only amount to $ 5,000 a month, for example, they’ll start putting the rest of their income into savings, debt repayment and investment until it reaches $ 0.
With zero-based budgeting, users have to monitor their spending throughout the month to make sure they stay on track in variable categories like groceries and gasoline. It can also be helpful to start building a separate savings account for any âsurprise expensesâ they encounter.
Either way, the whole point of zero-based budgeting is to reduce waste and make sure every dollar has a purpose.
With a 50/30/20 budget, you don’t have to make specific plans for every dollar you earn. Instead, you take your income and create a budget based on the following percentages:
- 50% of your income is spent on necessities, such as mortgage or rent payments, utility bills, insurance and child care
- 30% of your income is spent on needs such as travel, entertainment and dining out
- 20% of your income goes into savings, which includes investing and paying off debt
With this type of budget, you have a little more leeway to live the way you want while working to invest more and pay off your debts. However, spending 30% of your income on what you want could leave you working much longer to meet your financial goals.
Debt repayment budget
Next is the Debt Paydown Budget, a cut-throat budgeting strategy for people who want to get out of debt fast. With this type of budget, you will determine your income and compare it to your required monthly expenses and the minimum amounts you owe on credit cards and loans. From there, you’ll pay all the bills you have to pay, and then direct all of your “extra” money to pay off your debts as quickly as possible.
Many people associate the debt repayment budget with the debt snowball, a debt repayment method that requires you to list all of your debts, from smallest to largest. Once you’re ready to start, you need to make the minimum payment for your biggest debts while paying off as much as possible for your smallest debt. Over time, your smaller debts will be paid off, allowing you to âsnowballâ that extra money into your next smaller debt.
The debt repayment budget is only meant to be used for a short time, maybe a few years at most. However, it can help you pay off your debts quickly if you are disciplined and determined.
Budget Pay yourself first
Finally, the Pay-Your-Self First budget is one of the more flexible options. This type of budget requires you to allocate most of your income to your regular bills and expenses, your savings and your investments. You can also allocate money to pay down debt each month.
The key is to pay yourself first to make sure you don’t accidentally spend the money you’ve set aside on savings or paying down debt. In other words, you will transfer money to investments or savings accounts at the start of the month, and you will pay off your credit card bills and other debts as soon as you get paid.
With the Pay-Yourself-First budget, you can spend the rest of your money however you want. As long as you hit the financial goals you’ve set for yourself, there are no other rules.
The bottom line
If you want to get out of debt or start saving for the future in 2022, any of the budgeting strategies outlined here could work. However, you shouldn’t overlook the many budgeting programs that are out there to help you. For example, you can use Mint to track your budget and spending online, or you can rely on a company called Tiller to help you budget using spreadsheets.
Another company called Qube Money even allows you to set up digital cash envelopes which can help you get the benefits of budgeting envelopes without having to carry cash.
Whether you end up using a budgeting app or prefer the old-fashioned, pen and paper strategies instead, the most important step is just beginning.