It may seem overwhelming to build a budget, figuring out how to budget and steps to follow can be daunting especially if you have never used any form of budgeting in the past. You must have a strategy in mind.
What budgeting method is best for you?
There are multiple resources and methods available that can help you simplify and take steps towards creating a budget that works for you. Remember this, your budget is personal to you; make it simple. What works for your best friend or anyone else may not work for you.
I use the spreadsheet method because I like to see every bill or expense broken down not just a category. Although there are many people that I know that use the spreadsheet method, some people choose to use the 50/20/30 Rule.
What is the 50/20/30 rule?
The 50/20/30 Rule is basically breaking down your budget in three categories.
- 50% of your income goes towards essential and living expenses. Living expenses include, housing, utilities, transportation and groceries. These are your everyday needs.
- 20% of your income should go towards financial goals. Financial goals include retirement, savings, and paying off debt (banish debt). If you do not have debt, save and invest more. You can never have enough savings.
- 30% of your income should go towards discretionary spending. These will include eating out, gym membership, vacation, etc. Although this is at your discretion, I am a firm believer in paying off debt completely or put as much money as you can towards debt before discretionary spending or lifestyle choices. However, do not feel guilty about how you spend your discretionary income. Again, budgeting is personal.
How to apply the 50/20/30 Rule to your budget
- Initial question should be, how much do you make a month after all the deductions are taken? Knowing how much you earn monthly will be the first step in creating a budget.
- Write down your spending in the three categories listed above. Be honest with yourself and keep track of your spending. This will give you a clearer picture of where your money is going.
- Review your spending, are you going over the percentages listed above? If you are, where is your money going? Are these expenses necessities or wants? If these are not things you need, it is time to cut those expenses. If your spending is less in one of the categories, redistribute the allocation.
The 50/20/30 budget is not bad if you are just starting out budgeting. There are other budgeting methods to try if you have specific financial goals. No matter what budgeting method you decide to use, just make it personal and realistic. There is no point in creating a budget that does not work. If the budget plan works for you, you are more willing and ready to stick with the plan. Reward yourself occasionally when you meet and/or exceed your goals. Ultimately, you will develop and build long-lasting financial habits.
Please leave a comment to let me know what budget plan you use.