Budgeting is Simple Math, Really
Keep a few simple rules in mind, and you’ll master a budget in no time!
Savings + Expenses = Income
Every dollar you make will do one of two things: be spent or saved. A budget is nothing more than a proactive plan to tell your money where to go rather than looking back and wondering where it went.
Don’t Spend More than You Make
One of the most important rules to managing money is don’t spend more than you make. Unfortunately, credit cards today make it all too easy to overspend. Be careful — it doesn’t take long to fall deep into debt.
Pay Yourself First
This is probably one of the hardest rules for most people to adopt… the idea of paying yourself, rather than your bills, first. Simply put, if you only save what is left over, you’ll never save anything at all. Make saving a priority in your budget. Treat it like a bill if you have to!
Plan, Track, Adjust, Repeat
Managing a budget is an ongoing process. Income and expenses will change over time. Plan to regularly evaluate if your actual spending matches your budget and adjust accordingly so you can reach your goals.
Build a Budget
When building your budget, remember the 50/25/25 rule:
- 50% or less of your budget should be essential living expenses (needs)
- 25% or less of your budget should be lifestyle expenses (wants)
- 25% or more of your budget should be savings
If you need to climb out of debt or you have a big savings goal, then trim back your lifestyle expenses. Donations should be treated as an expense, but it doesn’t matter which category they go in as long as your total expenses don’t exceed 75%.
Assess your net income (that is, take-home pay after taxes) and any other sources of income.
Assign at least 25% of your income to savings for retirement, a down payment on a car or home, education savings, and an emergency fund.
Outline all your regular essential living expenses (needs) and your lifestyle expenses (wants). Note if each is a fixed expense, i.e. mortgage payment, car payment, etc. or a variable expense, i.e. groceries, fuel, electric bill, etc.
You may see areas right away that need adjusting to meet your savings goals or the 50/25/25 rule.
Track Your Spending & Adjust Your Budget
A budget only works if you follow it. Track your spending for one to two months and to see where adjustments are necessary.
- Did you overlook some lifestyle expenses?
- Did you over or underestimate some expenses?
Getting a handle on your expenses may require some lifestyle changes. If you are managing a budget with a significant other, you’ll want to have a serious sit-down and agree to the new budget and spending habits together.
Once you feel your budgeted plan is becoming a reality, commit to your savings goals by setting up automatic transfers to your savings accounts each month.
A Penny Saved is a Penny Earned
You’ve heard it before and oh, is it true! As you track your spending, you will likely find you’re spending more on the “little things” than you realized. Go ahead and calculate how much you spend at the coffee shop per year. That’s a big chunk of change!
Step back and ask yourself what’s more important. Define your priorities ahead of time, identify the areas you could cut back, and change your daily spending habits. This is how you tell you money where to go instead of later asking where it went.