How to Budget Your Money (In 5 Easy Steps)
Do you want to know how to budget your money?
Well, this guide will show you how to create a budget using the 50/30/20 budget method.
Another great method is the Dave Ramsey Allocated Spending Plan, but I'll stick to this one for this article.
I have chosen to explore the 50/30/20 rule because it's both easy to follow and easy to set up.
Not only will creating a budget will help you set your priorities, but it'll also help you reach your financial goals faster!
Let's get started!
How to Budget Your Money: Exploring the 5 Steps
I'm going to explore the five steps you must follow to create your budget before I explain how to use the 50/30/20 rule.
- Work out your after-tax income: If you get a regular paycheck then the amount you receive is probably the figure you are looking for. But, if you have automatic deductions for a 401(k) plan, savings and/or health insurance then you should add those back into your after-tax income. This will give you a better picture of where your money is going.
- Choose a budgeting method: As mentioned, the budgeting method I'm going to explore today is called the 50/30/20 method. Your budget should allow you to plan for the income you have, your savings, and using credit (wisely, if at all)—no matter what method you choose.
- Track your progress: There are plenty of tools you can use to track your progress. You can create a simple excel spreadsheet to track your progress or use a website like Mint.com.
- Automate money for saving/investing: Automating your savings/investing makes your life easier, and any great budgeting method should account for this.
- Revisit your budget regularly: Your income and expenses will change over time, so, it's important that you revisit your budget regularly—to ensure that it aligns with your current goals.
These are the five steps to create and maintain a working budget, now, It's time to explore the 50/30/20 rule.
The 50/30/20 Rule
The 50/30/20 rule is one of the most popular budgeting methods out there. It has become popular for its simplicity and flexibility.
Knowing how to budget your money with this method will benefit your financial situation in many ways.
While using this budget you will spend roughly 50% of your after-tax income on needs, no more than 30% on wants, and the last 20% on savings and debt repayment.
Why Should I Use This Method?
There are many benefits that come with implementing this budgeting method.
you will have enough money to indulge (occasionally), you will have your necessities covered—and you will regularly contribute to debt repayment and your savings.
Dedicate 50% of Your Income to Needs
First of all, 50% of your budget should be dedicated to your needs.
Your needs category should include things like:
- Minimum loan repayments
The part people struggle with the most while using this budget is differentiating needs and wants (which is typical for any budget).
Basically, any payment that you can drop without it being a major inconvenience goes under the wants category.
Things like cable or the latest cell phone are not needs.
Minimum payments that you must make are considered needs. These include minimum credit card and vehicle loan repayments.
How to Keep Your Budget In-Line
You will have to dip into the 30% for your wants category—if your absolute essential payments go above the allocated 50% of your after-tax income.
Now that we have covered the needs category it's time to explore the wants category.
Leave 30% Of Your Income for Wants
Anything that could be considered “discretionary spending” goes under the wants category.
For this budget to work, you must dedicate no more than 30% of your after-tax income to wants. Wants may include things like:
- A trip to Bali
- Gold class movie tickets
- Football tickets
- A new iPhone
Some people struggle to separate needs from wants, but, you're going to have to be tough on yourself if you want your budget to work!
If you haven't spent the full 30% of your after-tax income on wants for the month then you're doing great!
Some great ways to allocate any extra monies you have are to pay off debt or contribute to your savings/investing accounts.
Now, on to the last section of your budget.
Commit 20% Of Your Income to Savings and Debt Repayment
There are many ways to allocate the last 20% of your funds for maximum benefit.
You can increase your loan repayments (assuming you have debt) or increase your investment contributions.
Some Great Ways to Invest Your Money
There are plenty of ways to invest your remaining funds.
Some great ways to invest money include:
- Putting your money in a high-interest savings account
- Buying stocks
- Buying bonds
- Buying real-estate
While you have only budgeted 20% of your money for saving/debt repayment—you can certainly increase this percentage by reducing your discretionary spending.
But this budget seems to work well for most people so, I'm going to follow the old saying: “If it ain't broke, don't fix it”.
If you want to learn more about budgeting, check out the Dave Ramsey Allocated Spending Plan.
Do you have a budget?