Definition of Budget: “A monthly financial plan that divides your income into categories. It uses your monthly income as a cap on your spending and then determines how you allocate your money to savings goals and expenses within that limit” – LearnVest
Welcome to the first installation of Finance Friday! (yeah I decided to keep the name). Sharing tips on hair and skin care is my thing. But looking good is not nearly as important as having your finances in order. Besides, how will you buy all of your beauty products if you go broke! That’s why I’ll be taking at least one Friday a month (preferably the first) to talk about money.
Let’s face it. Creating a budget is the easy part. Sticking to it is a whole different ball game. Yet, not sticking to it can make or break you financially.
It doesn’t matter if you are in a low, middle or high income class. Living on a budget is critical because it helps you to see where your money is being spent so that you live within your means, whatever those means are. When you don’t budget your money, it’s easy to over spend.
How to Create a Budget
Creating a budget can be as simple as pulling out a blank sheet of paper or opening an Excel spreadsheet and listing all of your income and expenses. It should be set up in such a way that you can see exactly where each dollar of your income is going and that your expenses do not outweigh your income. You’ll also want to make sure there’s a place to note the due dates of all of your bills. Not paying your bills on time is as bad as not knowing how much you’re spending.
Now, that’s a simplified method for creating a budget. I lived off of a budget I created in Excel for years. I did pretty well with sticking to it for the most part. The problem is I didn’t prioritize my money based on what was most important to pay first. I knew that I should pay my tithes and myself first followed by my rent and bills. After that, the rest was fair game. That is until I was educated by LearnVest.
The 50/20/30 Budget Plan
When creating your budget,it’s important to allocate your income by priority. LearnVest recommends that 50% of your budget be allocated to your most important expenses like rent, utilities you can’t function without, groceries, and other expenses that would severely impact your life if you couldn’t pay them. Then, it’s recommended that 20% of your income be allocated to financial expenses including savings, debt, and retirement. The remaining 30% is recommended to be allocated toward your lifestyle expenses which include things like shopping and entertainment.
Now, the 50/20/30 plan is just that. It’s a plan. It’s not a hard and fast rule. In many cases, you may need to increase your most important expenses to 60%, thereby reducing your lifestyle expenses. While LearnVest suggests you follow the 50/20/30 guideline, in my opinion this is flexible based on your lifestyle and the stage of life you are in.
For example, I don’t typically spend 30% of my income on fun stuff and rarely go over that because I don’t have it in my schedule to go out and do a lot of extra curricular things. Having a special needs child doesn’t afford me that luxury. Therefore, I’m able to commit more toward my priority living expenses in order to live in a better neighborhood. NY living isn’t cheap and I’d much prefer to have less fun and live nicer from day to day. Your lifestyle may be different and only you know if rebalancing out your priority and lifestyle expenses is feasible.
I think the only hard and fast rule you should stick with is committing 20% of your income to your financial responsibilities. Paying your bills on time, saving for emergencies and funding your retirement are not optional.
Creating a budget may seem like a daunting task but once you set it up, you only need to spend a few minutes before or on payday to update it. The time you put in to creating your budget will help you to live a little more at ease where your finances are concerned.
Did you find these tips for creating a budget helpful? Please let me know in the comments below.
For more information on Budgeting, check out this LearnVest article: Budgeting 101
Disclaimer: I am not a financial adviser. The information shared here is based on information I have discovered and my own personal experiences. Please consult with a licensed advisor for your specific financial situation.