One major “adulting” thing we need to deal with is how to manage our finances. I guess we all want the same things — spend for our needs, have some extra for our wants and save for the future. However, resources are almost always limited and so we need to learn how to allocate them properly. And that’s where the struggle becomes all too real.
I have been budgeting (or at least trying) for as long as I can remember. When I was a student, I would budget my allowance for food, transportation and make sure I’d have some left for weekend hangouts with friends. When I started working, I included shopping money, share in the household expenses and some savings in my monthly spending equation. Budgeting got a way more complicated when I became a wife and a mom because I was already planning, not just for myself, but our entire household.
I read up a lot on budgeting tools and techniques and tried out those which I thought fit my needs and circumstance. From those I read up on, I would recommend the 50-20-30 Rule by Elizabeth Warren. It is simple and easy to understand that it makes the task less daunting.
Simply put, it states that you have to allocate your budget into three broad categories:
- 50% is for essentials like mortgage payments, groceries and utilities. These are the non-negotiables that you need to take care of month in and month out.
- 20% should be alloted for savings and investment.
- 30% remainder is for everything else that you want which includes shopping, movies, eating out and travels
As a first step, you need to know how much your regular monthly take-home pay is. This is the money which goes into your payroll account, net of all taxes and deductions. Knowing this will give you a clearer picture of how much you are working with.
Once you’ve determined your net pay, the next crucial step is to differentiate your needs versus your wants. Here, you really have to be stringent and meticulous with what you consider “needs” so as to keep with the 50% guideline. For example, utilities like water and electricity are needs. However, cable television, while it may fall under utilities, is not technically a “need”. This is something that should be included in the remaining 30% of the budget.
It is important to stick with the 20% rule on savings and investment. First things first, though. If you have a debt that accummulates monthly like credit cards or personal loans, it makes more sense to pay those off first before saving. Once you are done with loan repayments, start building an emergency fund. This fund can be between 3 to 6 months of your monthly expenses, whichever amount you feel comfortable with. If this is set in place, then you can study options for investments which would vary depending on your risk profile, goals and time horizon.
I personally like the 50-20-30 Rule because of its flexibility. It gives me the structure that I need to ensure that my needs and savings are secured but at the same time, it gives me a little bit of an elbow room to determine where I spend my money. This budget guide is pretty straightforward, making it easy to use and less complicated than most. Since it’s quite simple, I am able to follow through with my plans and budget with more success.
I hope this post will help you get started with your own budget if you still don’t have one. If you do have one, feel free to share your tips and budgeting tricks as well so we can all learn from each other.