A large component of this debt is made up of mortgage balances, which is in a different category than other forms of debt since it is 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, non-housing balances grew by $61 billion, with gains across all debt types,” noted the institution.
Five Budgeting Strategies To Try In 2022
If you are finding yourself with elevated debt levels that extend well beyond a mortgage as the year wraps up, you may be wondering if it’s time to turn a new leaf. Fortunately, there are plenty of tried and true budgeting methods that can help you start working toward financial goals, whether you need to save up an emergency fund or start chipping away at 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.
The Envelope Budget
Envelope budgeting works exactly like it sounds like it would. You start the process by figuring out how much money you want to spend in discretionary categories like groceries, dining out, clothing, and miscellaneous purchases, and you put the cash into separate envelopes that are designed for different types of spending.
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If you wanted to spend $800 at the grocery store, $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 cash in each. From there, you would spend down the balances on purchases that fall into each category, saving receipts along the way. Once the money is gone in any given envelope, it’s gone.
Of course, you can’t pay your mortgage or your car payment with cash in an envelope. This strategy only requires you to use cash and envelopes in discretionary categories where you may spend more or less in any given month. In the meantime, you would pay the rest of your bills however you normally would.
The benefit of envelope budgeting is that you set a specific amount of money in various categories and you stop spending when it’s gone. This can help you stay on track with spending limits you set for yourself, and from accidentally overspending with a credit card or a debit card. In the meantime, setting spending limits can also free up cash you can devote to other goals, such as debt repayment.
Zero-based budgeting is another strategy to consider, and it’s one that tends to work well for people who have serious financial goals on the horizon. With zero-based budgeting, families sit down to figure out how much they earn in a single month. After putting this figure in one column, they add up all their required expenses and bills in another category.
If someone brings in $7,000 per month and their total bills and expenses only add up to $5,000 per month, for example, they would begin allocating the rest of their income toward savings, debt repayment, and investing until they got down to $0.
With zero-based budgeting, users need to monitor their spending throughout the month to make sure they’re staying on track within variable categories like groceries and gas. It can also help to start building up a separate savings account for any “surprise expenses” they encounter.
Either way, the point of zero-based budgeting is reducing waste and making sure each 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 goes to needs, such as mortgage or rent payments, utility bills, insurance, and childcare
- 30% of your income goes to wants, such as travel, entertainment, and dining out
- 20% of your income goes to savings, which includes investing and debt repayment
With this type of budget, you get a little more wiggle room to live how you want while you work on investing more and paying down debt. However, spending 30% of your income on whatever you want could leave you working toward your financial goals significantly longer.
Debt Repayment Budget
Next up is the debt repayment budget — a hardcore budgeting strategy geared to people who want to get out of debt quickly. With this type of budget, you’ll figure out your income and compare it to your required monthly spending and minimum amounts you have due on credit cards and loans. From there, you’ll pay all the bills you have to pay, then allocate all your “extra” cash toward paying off debts as quickly as you can.
Many people couple the debt repayment budget with the debt snowball, a debt repayment method that asks you to list out all your debts from smallest to largest. Once you’re ready to begin, you would make the minimum payment toward your largest debts while paying as much as you can toward your smallest debt. Over time, your smallest debts will be paid off, paving the way for you to “snowball” that extra money toward your next smallest debt.
The debt repayment budget is only meant to be used for a short amount of time — maybe a few years at most. However, it can help you pay down debt quickly if you’re disciplined and determined.
Finally, the Pay-Your-Self First budget is one of the most flexible options out there. This type of budget asks you to allocate the bulk of your income toward your regular bills and expenses, savings, and your investments. You can also allocate money toward debt repayment each month.
The key is paying yourself first to make sure you don’t accidentally spend money you allocated for savings or debt repayment. In other words, you will move money into investments or savings accounts early in the month, and you’ll pay 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 cash however you want. As long as you’re meeting the financial goals you 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 discount the many budgeting programs that are out there to help. For example, you can use Mint to track your budget and your spending online, or you can lean on a company called Tiller to help you budget with the help of spreadsheets.
Another company called Qube Money even lets you set up digital cash envelopes that can help you gain the benefits of envelope budgeting without having to carry cash around.
Whether you wind up using a budgeting app or you prefer old-fashioned, pen and paper strategies instead, the most important step is just getting started.