How to Build a Simple Budget and Maximize Your Savings Rate

I’m not gonna lie. I find budgets boring. Even when you have tools like Mint or Prosper Daily that help you track expenses and automate your budget, it can be a pain taking the time to sync everything together and review it. And looking over those numbers can turn into a real snoozefest.

So why even take the time to think about a budget, much less create one? Because creating a budget — and sticking to it — is critical to building a sustainable lifestyle. A budget represents a framework for how you approach and manage your money.

If you spend more money than you earn, it’s only a matter of time before you’ll be digging yourself into a hole and start relying on debt. The first step to financial independence is to learn how to spend less money you earn. The second step is learning how to further cut your expenses and maximize your savings rate. This is where a kick-butt budget comes in handy.

Building a simple, no-frills budget

Some people prefer using budgeting tools that literally track every transaction and expense and tell you how your expenses are trending month to month. These tools are useful, but in my experience they can also be overwhelming. I instead opt to create a high-level budget — a template, so to speak, that gives me an idea of how much I can spend on key areas in my life while still being able to set aside money to save and invest.

Fair warning: If you have less discipline with your spending habits and are susceptible to splurge at unexpected moments (e.g. if you spent $50 on extra Poké Balls last summer), you should probably start with a tool like Mint that will give you more structure and regular feedback on your spending trends. If you have a fair amount of discipline — and trust yourself enough to stick to a rough framework and not go nuts buying Poké Balls — then this budgeting approach might be for you.

I look at my overall budget in terms of percentages, or the proportion of an expense compared to my total salary. Here’s what my simple, no-frills budget looks like (see original article for a clearer table).

Some bonus money that can serve as an extra emergency fund or cash cushion — preferably that ends up going to savings/investments.

I don’t have any student loan debt (thank you Berea College) — which typically would be one of the bigger expenses for someone who did use student loans to help pay for college. With that caveat emptor, here are a few takeaways for me and why I’ve been able to boost my savings rate.

How I maintain a 20%+ savings rate

In the U.S., the average personal savings rate is just 5.7%. That’s a number all of us should strive to top. I manage to get my savings rate close to 25% most months, and there are a few reasons why I’m able to do this without living like a complete hermit:

Get a housemate. Depending on where you live, it isn’t uncommon to have to spend 30% or more of your salary on rent or housing expenses. This is especially true in major cities like San Francisco, Washington D.C. (where I live), and New York City. I manage to spend just 18% of my salary on rent by living with a housemate. And, it turns out, I live in a better neighborhood that is far nicer than what I could reasonably afford to live in on my own. Spend less and live in a better neighborhood — it’s a win win.

Find alternatives to owning a car. I spend about 10% of my salary on travel, but most of that goes to plane tickets and the occasional Uber ride. I don’t own a car, and as a result don’t have to worry about monthly payments, insurance, gas, or maintenance costs (all of which add up over time). Not owning a car is obviously easier to pull off in certain areas more than others, and alternative transportation options can be hit or miss depending on the region. In the D.C. area, for instance, it’s relatively easy to get around using the metro, buses, Uber, or just walking/biking.

Save on the big expenses (housing and transportation). Housing and transportation (especially if you own a car) will likely be the biggest expenses you face as a young adult. These bigger expenses are where you can make the most meaningful progress to cut costs and, as a result, have more money to bump up your savings rate. Whether I spend 7% or 8% of my salary on food isn’t going to be a game changer, but the difference between paying 18% or 30% of my salary on rent is the difference between two very different lifestyles and savings rates

The bottom line

At the very least, you should manage your budget in such a way that the amount of money in your bank account is treading water or, ideally, increasing each month. If the balance in your bank account is consistently falling, it’s a red flag that your lifestyle is unsustainable and needs to be reevaluated ASAP.

Budgeting doesn’t have to be a time-consuming ordeal. Every three or six months or so I will review my budget above and make sure my expenses are roughly adding up as outlined in the budget. Some people opt for the uber hands-on approach (and there’s absolutely nothing wrong with that — more power to you), and others might be like me and prefer something that isn’t quite as intensive but moves you in the right direction.

The simple method outlined here serves as a framework for where you can better manage and cut expenses and maximize your savings rate. Go get ‘em.