Your personal finance questions, answered.
How to make room for fun in your 2020 budget
Reporting for jury duty. Standing in line at the DMV. Going to the dentist. Making a budget.
What do all of these have in common? They’re activities you’d probably like to skip.
And while budgeting certainly isn’t exciting, breaking down your spending can give you the ability to do things you enjoy.
Here’s how to leave room for more than just bills in 2020. (These simple tips spell F-U-N.)
Find your 50/30/20 balance
There are countless budgeting techniques out there, but one is particularly effective and easy to remember.
It’s called the 50/30/20 budget. This plan accounts for typical general expenses like your mortgage, rent, car payment and utility bills, as well as individualized discretionary spending such as travel, streaming services and more.
Here’s the gist: Start with your take-home pay. Commit no more than 50% of that figure to needs and fixed expenses, like your mortgage. Use 20% for savings and debt repayment. The remaining 30% can be spent on wants and variable expenses. A 50/30/20 budget calculator will do the monthly math for you.
Katie Brewer, certified financial planner at Your Richest Life, likes the flexibility of this method.
“It’s a lot less restrictive than $200 in this category, $300 in this and $127.50 in this one,” Brewer says.
It’s also freeing to know that this method allows you to spend money on things that are important to you, your family and your lifestyle.
“I really like for people to go through and tell me the top two things they really like to spend money on,” Brewer says. “Sometimes with a couple, those might be slightly different. We try to always have those be a priority in their spending plan.”
Your current spending percentages probably aren’t at exactly 50%, 30% and 20%. You’ll want to slowly modify until you get close to these levels.
Understand your money flow
Once you have an idea of your recommended spending, start tracking.
“Have your bills account and your spending account,” Brewer says. “There’s no cheating that. Whatever is in there is in there.”
Divide your money appropriately between them when it first hits your bank account, she suggests.
Robert Lopez, CFP and founder of financial planning company FP Guidance, advocates a similar strategy. While some people may prefer to keep everything in one place, he says separate accounts can be helpful — especially if you name them. You can even create different accounts for different financial goals you have at the same time.
For example, if you call one account your “honeymoon fund,” you may be less inclined to pull money from it than if it were just an undesignated savings account.
But don’t stop there. Implement more methods to ensure you’re not spending your mortgage money on subscription boxes.
Lopez recommends getting a different-looking card for each one of your accounts, if your bank offers that option. So, for instance, your grocery shopping card might be red, but your entertainment card would be blue. Depending on which card you use, you’ll be pulling money from the appropriate category.
Then, you can check your bank’s app to see where you stand.
Never stop trying
Remember that having a wants category in your budget isn’t an excuse to spend money on vacations or shopping sprees just because. Rather, Lopez says, it’s like a cheat day — a way to keep yourself motivated to follow the rest of your budgeting habits.
“If your whole budget is just things that you need and then paying down debt or investing … you’re never going to have any fun, and you’re not going to stick to it,” he says. “You’re going to break that budget.”
Your budget will be a work in progress, and that’s OK. Your spending in some months may be higher than during others. You’ll probably spend more on gifts in December than in March, for example.
Brewer recommends starting to pay for your variable expenses with a debit card so you can be proactive (rather than reactive) about your spending. Once you get the hang of it, you can switch back to using a credit card. Lopez says cash can be helpful, too. If you bring only $50 to a concert, for instance, that’s all you’ll be able to spend on merchandise and refreshments.
Find the method that works for you. As he puts it, a budget is something to grow with.
“If someone can build a perfect budget in January, they are in the wrong profession.”
Focus on Monthly Tasks to Hit 2020 Money Goals
A year is built one day at a time. It’s the busy Tuesdays when you never have a moment and the lazy Sundays when you can finally relax.
Focusing on small, cumulative actions can take you far, whether you want to train for a marathon, clean out your garage or start a hobby. This is especially true for money goals, for which daily habits can have big payoffs.
But while New Year’s money resolutions are common — with 84% of Americans setting money goals, according to a survey from NerdWallet conducted by The Harris Poll in 2017 — so is abandoning them. More than 20% of those surveyed ditched their resolutions within two weeks, and over half failed to achieve some or all of their money goals.
You can beat the odds, though. To hit your big money goals in 2020, focus on months and days.
Know your money and pick your goal
Do some initial research and get a detailed understanding of your cash flow, because you have a better chance of improving your finances when you know your starting point. The 50/30/20 budget, where half your income covers needs, 30% goes to wants and 20% goes to debt and savings, is an easy way to do that.
Use what you learn to decide on and write out your money resolution, getting as specific and realistic as you can. If you want to pay off your debt, for instance, list each account, its balance, monthly payment and interest rate.
“Whatever your goal is, it has to be trackable and quantitative,” says Levi Sanchez, founder of Seattle-based Millennial Wealth, a financial planning firm. “If you say you want to pay off your student loans this year, what does that really mean? How much will you pay each month?”
Make monthly goals
Divide your goal into smaller tasks. List the actions you can take monthly and even weekly that will build up to you hitting your target by year-end.
“People treat resolutions like a sprint when really it’s a marathon,” says Lauren Anastasio, a certified financial planner at SoFi, an online lender. “Anytime you have a goal in mind, break it down into as many mini-goals as you can. You feel more accomplished and you have more momentum when you’re checking things off a to-do list.”
To build an emergency fund of $1,000, for example, you’ll need to save a little over $80 each month. Or if you’re set on conquering credit card debt, divide your current balance by 12 to see the monthly payment needed to meet that goal, with adjustments for any accruing interest charges if necessary.
Build daily habits
Your daily money management is the groundwork for achieving goals. Build habits that make accomplishing your monthly money tasks easier.
To get better at sticking to your budget, for example, set aside time at the end of each day to review what you spent and how well you followed your budget. Automate savings or debt payments to the extent that you can.
“A lot of building good money habits comes down to knowing your needs versus wants and having a spending plan so you know what obligations you’re meeting,” says Paul Golden, managing director of communications at the nonprofit National Endowment for Financial Education. “I’m a big fan of automating things so the habit is almost forced.”
Give yourself a break — and a reward
Life happens. You might set a certain debt payment, then your car’s transmission blows — and drags your monthly budget down with it. Give yourself the flexibility to adjust the plan so you don’t just give up.
“One of the benefits of breaking the goal into mini-goals is that if you miss one piece, you don’t feel like you failed at the whole thing,” Anastasio says. “It’s always about how you frame the goals you set for yourself and giving yourself a clean slate at the beginning of each month.”
And reward yourself when you hit milestones, like choosing a robo-advisor to start investing with or having a month where you stick to your budget. Achieving money resolutions isn’t easy.
“I find people don’t celebrate the little things,” says Tania Brown, a Georgia-based certified financial planner. “A month where you didn’t rack up any new credit card debt is huge.”
This article was written by NerdWallet and was originally published by The Associated Press.
How I Ditched Debt: A spender, a saver and dreams of a family
In this series, NerdWallet interviews people who have triumphed over debt. Responses have been edited for length and clarity.
How much: Paid off $53,962 in 7 months
Kendall Berry was watching the royal wedding in her dorm room in 2011, praying for her own prince to show up, when Dave Berry, her future husband, walked through the door.
“It was honestly love at first sight,” says Kendall, 29. “On our first date … we talked about everything from our faiths, to our thoughts on divorce and other issues, to how many children we wanted and what we saw for our lives.”
One thing they didn’t talk about: money. And on that point the two couldn’t have been more different.
“I always viewed money as something to spend. I always worked, but I spent every penny that came in,” Kendall says. “Dave was the opposite. He was a great saver.”
Dave, 33, is in the Army. Before the pair met, he stockpiled his money, amassing a solid chunk of savings. His stash was quickly depleted as the two dated — mostly long distance, with him at flight school in Alabama and her at college in Pennsylvania — and later married in September 2012.
“I was probably the most expensive decision he ever made,” Kendall says. “While we were dating he would fly me down to visit him at flight school. He was always very generous with his money.”
In their first year of marriage, Kendall estimates they spent half of Dave’s savings, mostly on “stuff.” A new bedroom set. A couple of vacations. Things for the house.
They also bought a new car and built up a small balance on their credit cards, adding nearly $20,000 in debt to the more than $34,000 in student loans from Kendall’s time at Messiah College.
It wasn’t until 2016, when the Berrys started planning for kids, that they got serious about their debt. The couple, who live in Harrisburg, Pennsylvania, started budgeting in earnest and paid off nearly $54,000 in debt in just seven months.
Kendall recently connected with NerdWallet to share their story, which may inspire your own journey in paying off debt.
How much debt did you have and what’s your debt load now?
We’d accumulated more than $53,000 in debt, not counting our mortgage.
- Student loans: $34,181 ($27,000 plus accrued interest)
- Car loan: $18,781
- Credit cards: $1,000 (approximately)
We paid off all of our consumer debts — a little over $53,000 — and the current balance on the mortgage is $183,982.
What triggered your decision to start getting out of debt?
In 2015-2016 we started talking about how we really wanted to be parents. And for the first time, I was thinking “I want to have a lot of children, but I also want to stay home with those children. Is that possible?” I decided to total up the amount of debt we had and how much we were paying each month.
I was devastated when I realized that we had so much debt that there was no possible way for me to stay home. We had to have both incomes to stay afloat. That was the point where I said something has to change.
That very same weekend our church was offering Dave Ramsey’s Financial Peace University class. I told my husband, “We really need to take this, I think this will be really good for us.” He was a bit more skeptical — it’s hard for any of us to think we’re not doing something the way we should or that we have something to learn from someone.
We took the class and it honestly changed our lives. That’s when we became so motivated and intent about paying off our debt.
What strategies did you use to pay off your debt?
We were very fortunate. We both had good jobs that paid well; our household income at the time was around $130,000. And we still had a good amount of savings ($20,000). We put half toward our debt and kept half in our emergency fund, then used the debt snowball method to pay down the rest. Seeing those debts fall off was really motivating.
Every month we put as much as we possibly could toward our debt. Simply doing an actual budget — using the EveryDollar app — helped us cut back on a lot of random spending at Target or Bass Pro Shops or going out to eat. We did travel to see family, but we didn’t take any extravagant vacations during that time, whereas in a previous year we spent $4,000-$5,000 on a trip to the Bahamas.
We limited our food budget, stopped buying stuff we didn’t need and didn’t decorate our house or buy furniture for several of the rooms that were empty. To this day, we still have a completely empty front room, and when people come over, they ask if we just moved in. We just can’t justify buying furniture we don’t need when we have other goals.
In March of that year, we also got a big tax refund, more than $6,000, which all went toward our debt. We’ve since adjusted our tax withholdings to not have such a big return.
How did paying off debt affect your relationship?
Our relationship has only gotten stronger. It was wonderful to begin with, but we learned how to work together to achieve a goal. That was really powerful for the two of us, to learn that we can do hard things. That we can say “no” to ourselves — mostly me saying “no” to myself — there’s a maturity that comes with that.
And I learned to have more self-discipline and to work toward a goal. Having children was the biggest goal and the biggest motivation for us. Even though that has not worked out, it’s still a huge part of how we paid off our debt.
How has your life changed since you got out of debt?
I was feeling very burnt out at my job as a social worker. And everything with trying to get pregnant was stressing me out to the point it made me sick. We finally decided that we didn’t both need to work now that we’d paid off all of our debt and built up our emergency fund.
In the summer of 2018, I left my job and took a few months to just relax and recharge. During that time, I thought to myself: “What do I love? What’s something that I would do for free?”
I love telling people about our financial journey, so in August 2018 I signed up for Dave Ramsey’s financial coach master training. In November 2018, I officially started my business as a financial coach.
We also have a newfound financial freedom that will allow us to pursue fertility treatments. Right now, we’re still in the testing portion of it, but hopefully we’ll find out what our treatment options are in the next few months.
Our insurance doesn’t pay for anything and since I don’t have a full-time job, it will definitely be something we have to save for — whatever we decide to do. It’s just difficult in so many ways. It takes a physical toll. It takes an emotional toll. And then to have the financial piece on top of that. I feel very fortunate that the financial piece of it isn’t as much of a concern for us.
What are your financial goals now?
Our biggest goal right now is to have our house paid off by the end of 2025. Starting in the new year we’ll pay a little more than double payments. It’s kind of a lofty goal, but it’s doable. I love getting on those early mortgage payoff calculators and tweaking numbers again and again until they work.
Paying off our house would give my husband more freedom to pursue his career. And if fertility things don’t work out, we’ll have the financial resources to consider adoption or other options.
How to ditch your own debt
Inspired to pay off your own debt? Here are a few tips:
- Track your spending. Using a budgeting app to track their spending helped the Berrys identify places to cut back and put more money toward their debt.
- Focus on your goals. Having a goal helped the Berrys get serious about their debt and change their spending habits. What would you like to achieve in the next five years? Use that as motivation to clean up your financial habits.
- Adopt a debt strategy. The Berrys used the debt snowball method to strategically pay off their debt and build momentum. You can also use the debt avalanche method, which tackles high-interest debt first, saving you more money in the long run.
Photo courtesy of Kendall Berry.
When Leasing a Car Is the More Frugal Option
If you need a car, the most frugal option is to buy one that’s 2 to 3 years old, pay cash and drive it until the wheels fall off.
The least frugal option traditionally has been leasing, where you make monthly payments to drive a car but don’t own it. You’re paying for the vehicle during its most expensive period — cars lose more than half their value on average in the first three years — and you have nothing to show for your payments after the lease ends.
Few people opt for the frugal way, however, and car buying has changed enough that leasing may no longer be the costliest option. In some situations, leasing could be the most sensible.
Costlier cars, longer loans
To understand why, let’s survey the U.S. automotive landscape. Americans are:
- Buying more expensive cars.
- Financing larger amounts.
- Taking out longer loans.
Americans increasingly opt for SUVs and trucks over sedans, then spring for higher trim levels and more features than in the past, says Ronald Montoya, senior consumer advice editor for car comparison site Edmunds. The average purchase price for a new car in November was $37,981 — $4,699 more than the comparable figure from 2014, according to Edmunds.
Consumers stretch out their loans to get lower monthly payments; most buyers now opt for loans longer than five years. Even so, the average monthly payment is still a hefty $568, up from $492 five years ago. Leasing a similarly priced car would cost significantly less each month.
“You could probably get something for about $400 a month leased, easy,” Montoya says.
Lease vs. buy calculation
On paper, buying still comes out ahead mostly because you’ll own the car with some equity at the end of the loan. But such “apples to apples” comparisons of a six-year car loan versus two three-year leases leave out a lot of important details, such as repair and maintenance bills.
These costs tick up as a car ages, and warranties (which cover most repair and maintenance costs) usually end at three years. The expense normally wouldn’t be enough to make leasing the cheaper option — unless people don’t have savings and use a credit card or a payday loan.
That describes a whole lot of people in the U.S., where 2 out of 5 adults don’t have $400 to cover an emergency expense, according to the Federal Reserve. Plus, if you don’t have money for a down payment, it’s much easier to get a lease than a loan, Montoya says.
Another issue is that new-car buyers often don’t hang onto their vehicles long enough to get the most value from their purchase, Montoya says. Ideally, you would keep the car for many payment-free years.
What about buying used? That’s still the most financially sound way to get into a vehicle since you’re letting the first owner take the depreciation hit. It’s less sound, though, when people finance the car with a long loan, as many do. The average used-car loan is 67.5 months, almost as long as the 69.3-month average for new cars.
“By the time you’re done with (the loan), it’s a 9-year-old car,” Montoya says.
When leasing is best
Leasing is usually better than buying when:
- You’re affluent and want a new car every few years.
- Money is tight and you need the predictability of a car that’s under warranty.
- You’re acquiring a new electric vehicle, since the tax credits that encourage people to buy these cars new also contribute to faster-than-average depreciation.
“If you finance (an electric vehicle), you may end up underwater, owing more than the car is worth, whereas depreciation is already factored into the cost of a lease,” says Jeff Bartlett, deputy auto editor at Consumer Reports.
The most frugal way to lease is to avoid the temptation to upgrade, since the same payment already gets you a more expensive car. Instead, lease the same car you could afford to buy and save the difference. You also can lease used cars at some dealerships or by using a lease-trading site.
One way to combine the advantages of leasing and buying used, Montoya says, is to buy your car at the end of its lease. Ideally, you would do that with cash or a loan of three years or less.
“You’re the previous owner so you know how well it was taken care of, and you have nice access to a great used car,” Montoya says.
This article was written by NerdWallet and was originally published by The Associated Press.
Turn your next car purchase into a vacation
Car buyers who are willing to think outside the box can find rare and bargain-priced cars by doing a nationwide search and turning the buying process into an exciting road trip.
For example, Mark Holthoff located a rare 1979 Mercedes-Benz 280E in Santa Rosa, California. He flew there with his teenage daughter, and they drove the 400 miles back home to Los Angeles along the rugged Pacific Coast.
“Not only did I bond with my daughter, but I bonded with the car,” says Holthoff, editor at Klipnik.com, a community website for used-car enthusiasts.
Regional pricing differences
The cost of cars in different areas can vary sharply, says Julie Blackley, communications manager at iSeeCars, which aggregates used-car listings.
Case in point: iSeeCars data shows that a buyer in Harrisburg, Pennsylvania, could save $4,000 on the price of a year-old Honda Accord in Miami and drive it back home. Used-car prices are low in Miami, Blackley says, and it’s a great vacation destination.
Buying a car sight-unseen can be tricky. And when you figure in airfare and hotels, it doesn’t always save you money. “A thousand dollars ships a car a long way,” Holthoff observes.
But if you treat it as a “car-cation,” it can provide lasting memories and a car you love. Here’s how to buy that diamond in the rough and get it home safely.
10 steps to a fly-and-drive vacation
- Cast a wide net. Use car finder tools on Craigslist, car club sites and AutoTrader to search for rare, bargain or hard-to-find new cars with an unusual combination of options or a rare color. If you’re searching for an older vehicle, target areas where ice and snow won’t rust cars.
- Run a vehicle history report. Holthoff recommends buying a plan from a service like Carfax or AutoCheck that allows multiple vehicle history reports. The reports will help you quickly rule out cars that have problems such as damage from an accident or significant mechanical issues.
- Visit an online community. People who already own the model of car you want are the best source of information around potential problem areas. Many are willing to share their purchase prices as well. Google “owner forum” and the car make and model name.
- Check the price. Some sellers ask unreasonably high prices that would require too much negotiating to make the purchase worthwhile. Use pricing guides and look at ads for comparable vehicles to get an idea of the right price range to expect. Blackley says iSeeCars offers a free tool with a market report showing pricing in the area.
- Contact the seller. “You’re not just looking for a good car, but also a good seller,” Holthoff says. Find a seller who is informed, transparent and communicates well. Review all the specs with the seller and find out if they have the car’s title in hand. (A loan adds a few extra steps to the process.)
- Have the car inspected. Using Yelp, locate a mechanic that specializes in the make of car you’re buying. Ask if the seller would take the car to a mechanic to have it inspected at your expense. In Holthoff’s experience, most sellers are willing to provide this extra service as long as you are a serious buyer. Use the mechanic’s inspection report to negotiate the right price. Remember that, if you plan to drive the car home, you will want to have any critical work — such as installing a new set of tires — completed before you leave.
- Book your flight. Arrange a convenient time to arrive so you can conclude the deal that day. Some sellers might even be willing to pick you up at the airport.
- Arrange financing and insurance. Your current insurance policy will temporarily cover your new car, but you should compare insurance rates in advance. If you need to finance your car, a preapproved car loan gives you flexibility at a dealership. If you are buying from a private party, you’ll need to agree ahead of time on a preferred way to pay.
- Get your paperwork in order. Visit the DMV website. Every state is different. You may need temporary license plates or a trip permit. On the drive home, have proof of insurance, a signed bill of sale and title applications handy in case you’re pulled over.
- Re-inspect the car. Before you hand over the money, make sure the car lives up to the seller’s description. If you find an undisclosed problem, “It’s far better to book that flight back for a few hundred dollars rather than end up with a car that’s not what you really wanted,” Holthoff says. But if you’ve done your due diligence up to now, there shouldn’t be any surprises.
That’s it. The drive home is your vacation, and while you may want to explore, you don’t want to tempt fate.
“Stick to the beaten path and don’t do a lot of hot-rodding,” Holthoff advises.
That way, if something does go wrong with your new purchase, you can more easily get help. And keep a pen and pad at hand — by the time you get home, you’ll probably have a list of little squeaks and rattles to repair.