Making a budget is not as hard as it may seem, you just need to take a look at the numbers and make a plan. Many sources will tell you to do the 50/30/20 rule. This is; 50% of your income goes toward essentials such as your mortgage/rent, car, groceries, utilities and gas. 30% of your income goes towards wants and 20% goes towards your savings.
I think this is a great foundation and can help set some parameters for you when you are creating your budget. However, spending 30% of your income on wants, combined with 50% of your income going toward essentials, you are spending 80% of your take home income on liabilities. Yes, you need to get out and treat yourself, but you don’t have to break the bank to do so. This feeds into the debt mindset and ultimately never sets you up to be financially free.
I live in California and housing is not cheap, the 50% rule for essentials works. If you live in another area and can get away with budgeting less then I would certainly recommend doing so. Also if you want to escape the rat race eventually you need to invest, plain and simple. To better position yourself for the future put 20% (or more if you can) into investments, 10% into savings (grow 9-12 months cushion) and 5-10% debt repayment (depending how much debt you have). You would be left with 10-15% of your income for your wants.
You always hear “pay yourself first”, but if 80% of your money is going to someone else there isn’t much of your money left for you.
So how do you make an actual budget? Here are a few easy steps to get you started.
Calculate your net income (all sources)
If you are paid a salary or work as a full-time hourly employee, then this is simple. It’s your take home pay after all your deductions. If you are commission or your hours vary, then you will need to average your income to give you a baseline average. Same thing goes for those who are self employed since income can vary significantly. Also, as I put in the title “all sources”, you may have a side hustle or receive dividends, ect., these will also get averaged out over 12 months and calculate towards your income.
Look at your statements
The next best place to start is to face reality and look at your financial statements. Things like your bank statements, credit card statements, utilities, student loans, car, mortgage, and any other statement you may have. Once you have your statements you can begin to take note of where your money is going.
Create a list of all expenses (fixed and variable)
Now that you have gathered all your statements it’s time to break it down. Make a list of all your fixed expenses. These are the expenses that do not change or have slight variations which you will continue to pay them each month. Variable expenses are things that change often, generally this is your shopping or going out habits.
Tally up the numbers
Here is where you can sleep easy or loose a few hours of zzzz’s. Once your expenses are separated into categories of fixed or variable, you will want to break them down further into subcategories and add them up. Once you have each category added up its time to combine them into your grand total. So, if you have a column for eating out, you want to add up the total of what you spent on going out for the month, then combine this with the total from all your other bills/categories. These two numbers will ultimately tell you how much you spend in one category and how much money in total you have going out each month.
Set a goal
We are all motivated by something. Most of us know this as our “why”. Goals will help you stay motivated and on track. You can also measure your progress with a goal tracker.
Revisit
Lastly revisit your budget every three months. Track your progress, look for new negative spending trends and adjust as your life changes.
No matter what stage of life you are in, a simple budget and regular tracking of your spending will help you achieve your financial goals.