Editor’s note: In November we posted an article stressing the importance of budgeting and paying yourself first. This article takes a more in-depth look at how to get your budget started by maintaining your monthly finances.
A budget is more than just watching what you spend. It’s about getting the most out of your money and giving you a way to balance your current expenses and future goals, while still allowing you to enjoy the things you want out of life. Having a financial plan in place can keep you on the right track with responsible saving and spending.
Why should you create a budget?
Creating a budget allows you to plan ahead and get yourself on firm financial footing. Think about all of the things you spend your money on in a month. Chances are you have a general idea of what your expenses are, but have you ever been left asking yourself, “Where did all my money go?” The 50/20/30 rule is an example of an effective way to give you more financial control over your expenses.
The 50/20/30 rule
The 50/20/30 rule is a guideline that can help you determine how much you should spend and how much you should save each month. As an example, let’s say your take-home pay (after taxes and 401k contributions) is $50,000 annually. That’s $4,166 per month.
50 percent toward your essentials
Your essential spending should go toward things you have to pay for in order to live. In general, this includes expenses like housing (rent or mortgage), utility bills, food, and transportation. So, in our example, half of your monthly take-home pay would be around $2,000.
20 percent toward your savings
Your savings includes any sort of long- or short-term goals, loan payments, and emergency funds. Referring back to our example, 20 percent of your monthly take-home pay would be around $800. Think of this percentage as your plan to get ahead or help build your emergency fund.
30 percent toward your personal expenses
This category makes up the sum of miscellaneous expenses that can enhance your lifestyle, such as restaurants, personal shopping, travel, or even your cellphone bill. Our example would put your spending amount at around $1,200 each month.
How to set your budget
There are several steps you’ll need to take in order to come up with a budget that works for you and your lifestyle. You’ll need to track your income vs. spending, see where your money is going now, and then determine what changes you might make based on the 50/20/30 rule above.
Determine income and track spending
There are a few different ways to track your spending. You can record your daily spending in a notebook or use a program or an app on your smartphone. A few programs that do a nice job of tracking your spending are:
The most popular budgeting app available that combines an all-in-one approach, including tracking your finances, helping you make budgets, checking your credit, and sending alerts right to your smartphone.
A top-rated personal finance software with a variety of features that allow you to personalize your finances. Whether it’s a general household budget or managing more detailed spending habits, this program has something for everybody.
An on-the-go app that allows you to create budgets, manage money, track your spending, and split transactions easily with quick overviews of your planning, spending, and remaining funds.
Put your plan into motion
It’s easy to simply talk about budgeting your money but it takes discipline to follow through on these plans and find the funds to support your spending and saving goals. Here are some initial things you can do to stay on track:
Spend less, find extra money
Utilities and food are considered essential items, but you can always look for ways to cut down on other lifestyle costs, such as cable bills or eating out at restaurants. Limit the number of channels you get, or look for coupons when buying your groceries and make food at home instead of eating out. When making other personal purchases, think about them carefully. Ask yourself if you really need that item. By making more thoughtful choices and considering all of the options, you’ll find extra room in your budget to save.
Automate your payments
This will not only ensure you have enough for your essential spending, but it’s a great way to pay your bills on time. By pre-allocating monthly payments, you can manage your spending and saving easier, knowing that those funds have been reserved for known expenses.
Create a specific goal, such as paying off a debt or funding your retirement. When you have certain ambitions for your financial planning, it can be easier to keep your spending and saving on track. Remind yourself of these goals and the payoff for achieving them.
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