There is no question that budgeting will stand the test of time and is one financial aspect that is here to stay regardless of your stage of life, financial situation, or knowledge of how to manage a budget. It is one of the cornerstones of achieving financial success and maintaining financial health and freedom. The task of setting up a budget can seem more stressful than it is worth; however, once it is up and running it is an essential tool that can only help lead you to stability, success, and most importantly a lifestyle you can afford and learn to improve upon.
Financial experts across the globe recommend using the 50/30/20 rule when first tackling a budget. This means putting 50% of a paycheck to your needs, 30& to your wants, and 20% into your savings account. This is a simple way to look at your finances and establish exactly where your money should go and where changes need to occur.
Break Down How You Spend Your Paycheck
For the 50/30/20 rule to succeed you need to know exactly what percentage you are currently spending on your wants and needs and how much you are saving to make the most effective changes. Ask yourself if you need that expensive haircut or dinner out several times a week and find the areas of income you can change to make you more successful in the future.
Have a Goal for the Future
Budgeting ultimately fails because the budgeter does not see how the budget can move them towards their goals. Are you saving up to buy something or for school? Do you want to buy a house or move into a better apartment? All of these things require financial planning. Take stock of what is truly important for yourself now and also in the near future so you can ultimately plan and budget for those goals to achieve them faster and with less stress.
Save 50 Percent of Monthly (after tax) Income for Necessities
Your necessities are things like groceries, rent/mortgage, internet, and utility bills. Make a list of recurring monthly payments and keep a running total of expenses you anticipate each month. If you’re spending over the allotted 50 percent, find areas where you can make changes. Reduce your electric bill, find coupons for groceries, etc.
Have Fun with 30 Percent of Your Income
This is the fun part of your paycheck where you can treat yourself as much as that 30 percent will allow. These are expenses like drinks with friends, new shoes, Netflix subscription, etc. These are going to be different for everyone, but make sure to stay within your limits and use it as an opportunity to try new things and even find enjoyable free activities you and your friends can enjoy.
Plan Ahead with 20 Percent (or more) of Your Income
At the very least, 20 percent of your paycheck should go towards savings. If you have debt, such as car payments or school loans, these should be paid off more quickly to reduce how much interest you pay. Once your debts are paid off, build up your savings, account for emergency expenses and as a fund for your future goals. Once you become debt free and have built a decent savings balance, think about investing or starting a retirement fund.
Make the Necessary Changes
None of these things matter if you aren’t willing to make a change and stick to your budget. Remember that budgets are never set in stone and will constantly change as much as you do. Keep an eye on your spending and which categories your expenses fall under to stay within these guidelines. Record every purchase you make or track expenses with an app on your phone to make it easier. Once you get a firm grasp on juggling expenses where they belong managing money will become second nature and your financial situation can begin to flourish.