Answers to your budgeting and debt management questions

Planning for your future means looking at your finances today, so you can prepare for a greater tomorrow. We’re here to help with budgeting and debt management tips to get you started.

Budgeting 101

What should I consider when budgeting?

This is a common question, as life can throw many unexpected curveballs that derail your goals. So, it’s a good idea, after paying your bills, to consider tucking away some savings into an emergency fund for unexpected life events, such as car repairs. You’ll likely also want to save for potential upcoming occasions or events, like family trips.

Is a budget just about paying bills?

While budgeting does help with paying your bills on time, you’ll also want to consider setting funds aside to:

• Save for emergencies: Anyone can experience unexpected medical situations or even income loss. Setting up an emergency fund of $1,000 is a great place to start. While it won’t cover your expenses for six months, it can help cover most surprise emergencies like car repairs.
• Pay down debt: This means being proactive by calling creditors. Setting up automatic bill payments can also help avoid building further debt or late fees for unpaid bills.
• Save for retirement: This is an opportunity to invest in your future self. You’ve worked hard for your money so you can enjoy it in your golden years.
• Save for future plans or expenses: This might include saving to buy your first home, your children’s college education, or expenses in retirement.

What is the 50-20-30 budget rule?

One of the best budgeting tips you can follow is the 50-20-30 rule, which suggests that you spend 50% of your after-tax income on needs, 30% on wants, and 20% to savings. This is a great way to allocate your money into budget categories, especially if you’re creating a budget for the first time.

Debt Management 101

Should I build up my savings, or pay down my debt?

First, consider budgeting for expenses that you know are coming to help prevent you from going further into debt. This includes monthly bills such as rent or mortgage, along with less frequent expenses like insurance premiums and home repairs. You’ll likely need to strike a balance, and using a budget can allow you to save, while also making progress toward paying off what you owe

Should I invest or pay down debt?

This really comes down to your risk tolerance. Some may want to pay down their mortgage with a lower interest rate, rather than invest and see potential returns that can be higher than the interest they’re paying, because owing anyone money makes them uncomfortable.

A good rule of thumb is to first consider building up an emergency fund, then pay down high-interest or variable rate debt, while making sure you are putting away at least 10% for retirement. After that, you can figure out whether growing your nest egg or paying down your debt first makes sense for you.

What are different methods I can use to pay off debt?

Your debt reduction strategy will depend largely on what you think will work best for your personality or situation.

High-low method (or, avalanche method)

This strategy recommends you pay off your accounts in order from the highest interest rate to the lowest. Every time you pay off an account, you can free up more money each month to put toward the next debt. And since you’re tackling your debts in order of interest rate, you may pay less overall and possibly get out of debt faster

Snowball method

In this strategy, you’ll pay off your debts in order from the smallest balance to the largest. Many people enjoy this method because it includes a series of small successes at the beginning—which can give you more motivation to pay off the rest of your debt.

Debt consolidation

If you have no income left over after you have paid your necessary living expenses and minimum debt payments, you may want to consider a debt consolidation loan to lower your interest rates. When you consolidate your debt, you’ll only have one bill to worry about each month. If you choose this method, be sure you take the time to shop around to find a personal loan with the most favorable terms.

Disclosures

This material is intended to provide information only. This material is not intended as advice or recommendation about investing or managing your retirement savings. By sharing this information, Prudential Retirement is not acting as your fiduciary as defined by the Department of Labor or otherwise. If you need investment advice, please consult with a qualified professional. Retirement products and services are provided by Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, or its affiliates. PRIAC is a Prudential Financial company.

© 2021 Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.