While many associate the word budget with feeling constrained and locked in, budgets are actually a freeing tool that can help you take control of your finance health and make safe decisions for your future.
When you create one for yourself, it’s important to keep in mind that you are using this as a tool for money management today and as a step on the path toward your future financial goals.
There are many different strategies toward creating one that works for you, but one of the most popular templates to use is the 50/20/30 plan.
Get Started Managing Your Finances
1. What Is Your Take Home Pay?
You need to know your income after taxes. For many people, this will be the same amount they receive on every paycheck, as their taxes are automatically deducted for them. If you have deductions made for your retirement savings plan or your insurance, add those totals back into your pay as you’ll want to know these numbers in the next steps. If you need additional income, check out this site that pays up to $25 per survey.
2. Know What You’re Actually Spending
It is often helpful to use an app to track your spending habits so you can get a more detailed look at this. What do you spend on groceries every month? How much are all of your subscription services? What are your rent, mortgage, or insurance payments? What are you spending on online shopping? What are you normally spending on your credit cards?
Everything should be clearly written down and tracked so you have a realistic picture of where your money is currently going.
3. Plan How You Would Like to Budget In The Future
Now that you know what you’ve been spending, how would you like to spend?
The 50/20/30 rule is designed as a helpful template for making this decision. In this scenario, you would spend 50% of your income on your life essentials. This includes your health insurance, rent, car payments, and grocery bill. If you need it to survive, it goes in this sector. If you are currently spending more than 50% of your income on your essentials, you’ll want to take a look at whether you can lower that. For example, could you be saving money in your vehicle expenses? Would refinancing your mortgage lower your payments?
The next section is your savings and debt payment plan, where 20% of your monthly income should go. If you are putting money into a 401k or paying off credit cards, this comes from 20% of your income.
Then the final section is the 30% where your discretionary funding goes. Streaming services like Netflix would be counted here. Saving money for short term fun goals, like travel plans, would come from this portion of your income.
This last section is one of the most beautiful parts of having a budget plan that takes into consideration the reality of your life. You know exactly how much money you have to spend on fun purchases. Can you afford that vacation your friends want to take? Consulting your financial plans gives you an answer right away.
4. Regularly Check In On How You’re Doing
Continue to track your spending and see how you’re really doing. How close are your numbers to your 50/20/30 plan? Your life and your expenses will shift with time. Revisit your finances regularly to make sure they’re in line with your goals and expectations.