Learning how to budget your finances is the first step to gaining control of your money and creating wealth. Although the manner in which you budget your money is unique to your need and income, there is a general blueprint that can guide our budget process. The 50/30/20 rule simplifies by the process by breaking it into three categories rather than breaking it into multiple categories that are difficult to follow.
The 50/30/20 rule applies to fixed costs, financial goals and flexible spending respectively. Fifty percent of your income should go into paying bills such as rent, gas and food. Cutting on costs is the most effective way of making savings. Thirty percent of your income should go into making payments or contributions that will secure your financial foundation. Automating your savings contributions and debt payments will not only help you to save consistently, but will also ensure you don’t fall back on payments.
Furthermore, it is important to ensure you spend about twenty percent in flexible spending. This refers to day to day expenses that vary from month to month. They include groceries, shopping, entertainment and gas. Although gas and groceries are regular bills, they are included in this category because they can vary greatly.
The most effective way of determining your flexible amount is to subtract your fixed costs and financial contributions from your net income. Net income refers to the amount of money left in your bank account after taxes and 401K contributions have been deducted. Yet, if you are not very good at personal accounting or business tax returns – you may seek a professional accounting help.
I’d say if you have even a little doubt on how much you should invest for financial obligations, like retirement saving, child’s college education or saving for the next vacation, you should go visit a professional financial planner or a money coach.
(Read – Restoring financial order in a day)
In addition, the budgeting process can be modified by a number of factors. First, if you are a young person who has just started earning, the amount of money left after meeting the basic necessities may be little. However, anyone can successfully budget for their money regardless of their age.
Moreover, this is the best time to experiment with the various budgeting options available. The budgeting process should be an essential element of all your life decisions. For example, choosing to delay getting into marriage due to the limited financial resources will have a net positive effect on your financial health. In addition, choosing to forego graduate school will help you to avoid incurring more student loans.
However, everything should be chosen for value and quality rather than a simplistic cost basis. Pursuing further education should be influenced by the value it adds to the individual in all aspects as opposed to a mere consideration of how much it will cost. In addition, it is good to get help from a professional financial planner. Fortunately, there are websites such as LearnVest which offer qualified financial guidance.
For married couples the budgeting process should be a joint effort. Parents should involve the children in budgeting for some of the famil needs such as groceries, bills and family entertainment. This will not only educate the children about the importance of budgeting but will also help them to appreciate the finances of the family. ‘
In addition, seeing the electricity, water and telephone bills may help them to use these amenities in a more responsible manner so that they can save money and use it on other activities such as entertainment.
Credit cards should be used in a deliberate manner. In fact, you should not have one unless it is a necessity. Buy only goods that you can afford within a short period of time. Impulse purchases should be avoided as much as possible. Also, credit card debt should be cleared as soon as possible.
There are chances that even with a meticulous planning your budget may fail. Just because most budgets fail. But depending on your situation going through the budget will install a financial discipline in you and when you no longer follow your budget strictly, you are still having in you a sense of financial responsibility. You tend to splurge less, you don’t have buying impulses any more. So even if your budget fails, try to stick to it till you can and have the financial responsibilities grow in you.
In conclusion, it is important to note that the 50/30/20 rule is just a general guideline which should be adjusted to fit your lifestyle and financial goals. In addition, buying things for value as opposed to cost will result in long term savings. Finally, the budgeting process requires a lot of discipline.
Brandy @ Busted Budget says
We do a budget every month. I can honestly say it is SO helpful!
We used to have an annual budget. But now we do a monthly one since we are buying our home and cost control i specially needed.
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Budgeting every month helps a lot. I was living paycheck to paycheck for a long time and that all stopped when I started having a written budget and tracking my expenses.
Budgeting does a wonder to your finances. Sure you have some sleep less night towards the end of the month. But in the long run budgeting helps controlling spending habit.