Simply stated, a budget is a spending plan. A budget allows you to know how to balance your income against your expenses for a particular period of time. A monthly budget is the most common. If asked how much money you spend monthly, would you have an answer to that question? Creating a budget will give you the tools to have an answer to that question. So where do you start?
1 – How much money do you take home each month after taxes? For most people that amount is fixed. If you work a job with fluctuating earnings, figure out your average monthly income over maybe 3 months. Consider all sources of income. Do you have any activities that supplements your income? Personal training? Dog walking? Catering? Baking? House cleaning service? Rental income? Include all the cash you take in.
2 – How much money do you spend each month?
- Car payment
- Utilities (cable, phone, water, electricity, water, etc.)
- Insurance (property, vehicle, life, etc.)
- Child support
- Installment payments (credit card, student loans)
3 – Establish the 50-20-30 rule.
- 50% goes to fixed living expenses (i.e. rent & utilities)
- 20% goes to financial goals (i.e. paying down debt & savings)
- 30% goes to flexible spending (i.e. gym membership & entertainment)
Start tracking your spending. We keep food diaries to help track food intake. People wear fitness trackers to count their daily steps. So think of a spending log in the same way. Log every dime you spend. Big ticket items like rent are easy but the water bottle from the vending machine at work is easy to forget. Track spending for one month. Once you have all the data, separate the expenditures into the three categories then total each up. Divide the sum for each category to get the spending ratio.
Does your current spending pattern match the rule? While the rule allows for some flexibility, fixed living expenses should not exceed 50% of your income. If you’re overspending in one category, consider how to adjust. What can you do differently with your cell phone package or how often you eat out? Are you buying groceries that end up in the trash? The most important thing is to make the rule a habit, be honest, be willing to tweak as necessary while staying close to the rule.