Don’t feel down on yourself if you struggle with money sometimes. In fact, 44 percent of Americans wouldn’t be able to cover a surprise $400 expense, according to Forbes. Almost everyone would like to make more money, but that’s not always possible. You often can, however, make the money you already earn go further. That’s where a budget comes in.
A budget is just a plan for how you’re going to spend the money that comes in. Everyone has different expenses, incomes and debts, so everyone’s budget is going to look different. But there are a couple of good places to start.
It can help to divide your spending into three main categories: necessities, wants, and debt repayment/savings. Necessities are things you need to buy. These are things like your rent, your groceries, minimum payments on credit cards and loans, utilities, etc. Wants are things you want to buy, but don’t need to. These are things like new clothes, dinners out, your morning cup of Starbucks, etc. Sometimes the line isn’t so clear. Is a gym membership a want or a necessity? You’ll ultimately have to be the judge for yourself.
Finally, there is debt repayment and savings. These categories are combined because the mix between debts you need to repay and money you need to save will depend on a multitude of factors, like how close you are to retirement and how pressing your debt is. So exactly how much goes to each category will vary greatly from person to person.
Now that you have a way to divide your expenses into different categories, you can decide on how much money to devote to each. There are tons of free budget templates online that prioritize different financial needs, accommodate different savings plans, and have different amounts of risk. You can do more research into finding what budget could work best for you, but this article will focus on a common budget called the 50/30/20 budget.
The 50/30/20 budget is great for those budgeting for the first time because it’s incredibly simple, it’s easy to implement, and it doesn’t take any complex math. First, find your after-tax income. This is basically whatever amount you receive in your paychecks each month. Don’t count anything taken out for taxes, but do include expenses like automatic 401(k) payments, health insurance deductions or anything else that in some way comes back to you. If you own your own business or make money from a side hustle, don’t include taxes or direct business expenses.
After you find your after-tax income, the 50/30/20 budget allocates your money in this way: 50 percent of your after-tax income goes towards your necessities; you can include paycheck deductions like health insurance here. 30 percent of your income goes towards wants. And finally, 20 percent of your after-tax income goes towards debt repayment and savings; you can include things like your 401(k) deductions and Social Security deductions here. See? That wasn’t too hard.
The 50/30/20 budget isn’t a hard-and-fast rule. It’s not going to break if you bend it a little. Maybe you have a lot of pressing debt, and 20 percent doesn’t make progress on your debt repayment as quickly you’d like. That’s fine — you might choose to bump up your debt repayment and savings allocation to 25 percent and take 5 percent away from your wants. Maybe you have a high cost of living and 50 percent isn’t enough to pay your necessities. That’s OK — you can take 5 percent out of your wants budget to cover your necessities. The 50/30/20 budget isn’t a template as much as it is a starting point.
The most important thing is that you implement your budget, whichever budget you choose. It could be drastically different from the 50/30/20 budget, but the important thing is that you set boundaries for how you spend and stick to them. Once you’ve established a budget, you can do even more by following these secrets that your financial planner wants you to know.