06/01/2020
How to Create a Simple Budget That’s Easy to Follow
When you get your first paycheck, you aren’t exactly given a guide on how to spend it. The possibilities are endless: you could buy a new gaming system or a fancy dinner out—or start a lease on a Ferrari. And, oh yeah, you’ve probably got rent to pay and groceries to buy on top of all that fun stuff. If you aren’t careful, at the end of the month, your bank account balance might be at zero. (Or worse, you could overdraft and get charged or be forced to take on credit card debt.) And that pattern can continue for years.
So how do you keep yourself in the green? The b-word. Budget.
If you have yet to master the art of budgeting, you might benefit from the 50/20/30 rule, a simple framework for allocating your cash.
How It Works
The 50/20/30 budgeting rule breaks up your monthly take-home pay into three categories:
50 percent for necessary expenses: Add up your basic living expenses, like housing, groceries, utilities, cell phone bill, and pretty much any other regular bill with a due date. For fluctuating payments, like an electric bill, plan around a number at the high end of the range. It’s better to overestimate and have money left over.
Hopefully, these expenses add up to about 50 percent of your total pay, but if they don’t at first, don’t be discouraged. If, for example, your fixed costs equal 60 percent, you can look for ways to lower them (like negotiating your cable or phone bill or adjusting your thermostat for additional savings) or cut 5 percent from the next two categories, which are more flexible. (Ideally, you’d cut your flexible spending, not financial goals.)
20 percent for financial goals: These include saving and investing, like through your retirement and regular investment accounts, as well as any additional debt payoff plans. In other words, your regular monthly student loan payment would fall under fixed expenses, but if accelerating your loan repayment is among your goals, file those extra payments here.
30 percent for flexible spending: Think of this final category as your personal spending fund. Everything from restaurant meals to entertainment to holiday shopping falls under this umbrella.
Because you’ve already taken care of your necessary expenses and financial priorities, you’re free to use this bucket any way you’d like. But if you know you’re going to be spending a lot on seasonal expenses, like holiday gifts or travel, you may want to start earmarking some of that money early on so you can avoid going into debt later.
