That dreaded word no one wants to hear or talk about. It has a strange stigma around it, looked down upon like no one needs it. But the importance of budgeting is more vital than you know.
Budgeting is only a plan for your money. It is not some restriction on your life or created for poor people. Many people think only those in lower class standings need a budget to survive month to month. I hate to burst your bubble, but budgeting doesn’t restrict you, it helps open up a path to financial freedom.
At the very least, you should be looking over your budget once a month to allocate all of your money. My wife and I are obsessed with managing our money so we tend to check the status of our plan multiple times a month. At the end of each month however, you should be sitting down to prepare for the month ahead.
Do I Really Need a Budget?
Budgets are merely a tool to organize your finances to help you use your money wisely. It is something every single person should be prioritizing. Without it, you could potentially be spending more money than you make each month without even realizing it. You may be paying for subscriptions you never use or just have money sitting around in your account.
Some people think just keeping an eye on their spending is good enough. Just keeping an eye on your children isn’t enough. You need to teach them proper etiquette and set rules for behavior. Without rules or guidance, you’re just going through each month blind.
If you plan to buy a new car or a house for example, how do you plan to pay for it? I’m sure you decided to put some money aside each month you had enough. With proper budgeting, you could save the maximum amount each month and have a clear idea of when you can make that purchase and exactly how much you would save. Budgets help make your life more efficient and take a weight off your shoulders when dealing with money.
The Best Way to Budget
There is no best method to budgeting, because every person’s situation and mindset is different. Some may want a more loose structure and rely on ranges of money for a different category in their life. So for example, every month they would dedicate 25%-30% of their total monthly income towards spending. That’s totally fine, but it requires you to keep a careful eye on how much you exactly spent in each category. Otherwise you may overspend each month.
One of the most common practices is the 50/30/20 rule. 50% of your monthly income would go towards necessities like mortgage, electric and water bills, etc. Any living expense would fall under half of your income. 30% goes towards spending. Any non-essential spending goes here. Monthly subscriptions and buying clothes would fall under this category. This is the category that will help you live your life the way you want, without going overboard and spending too much. Finally 20% is dedicated to saving. IRA contributions, emergency funds and investing all fall within this section. This is my favorite category because naturally I’m a saver. I don’t believe in living an extremely frugal life, but I like to save the maximum amount each month.
I am currently sitting here writing with a hole in my shoe. I need to buy new ones, but the cheap inner voice in me is telling me to just wait until the world opens up back up. No one is seeing me in my crummy shoes anyway. I tend to wear my clothes until they are useless, full of holes and worn out. I even wear shirts I bought 8 years ago. This is an extreme mentality of saving money, but you get it. I try to not spend too much on myself unless needed, but I have that 30% put aside to buy new clothes if needed.
What Plan Do I Use?
My wife and I look at our finances a lot. We are in the hustle mode of finishing off our debt and looking to buy a house. We have the set date in mind to look for houses and are completely focused. Since we are zeroed in on all the money we are earning and spending, we like to be as specific as possible with where each dollar goes.
That isn’t to say we don’t leave some wiggle room. We’re humans. We’re weak sometimes and may want to buy something. It happens and we’re fully aware of that, so we try to budget with that in mind. Our necessities, like our monthly rent and bills are less than 50% of our income, so we allocate that to our saving category.
If you’ve found that you have money left over at the end of a month, I like to place all the excess money into the savings category. Some may place that into their 30% spending category. I don’t recommend that, but it’s your budget.
We are trying to watch our spending and not buy anything lavish, but we’re planning to leave that 30% of our budget just in case. Since we under spend in the 50% category of necessities, our new structure looks more like 30% necessities, 20% spending and 50% saving. My goal is to get that 50% savings percentage up higher to around 60-65%, but like I said, we’re human and are currently hitting all of our short term and long-term goals. I don’t want to take away from experiences we may or may not have within our spending budget.
Tips for Budgeting
Make sure you and your partner are on the same page. Budgeting can be stressful and cause tension, but it’s important to organize where your money is going each month. My wife and I try to make it fun by putting a large piece of paper on the wall and spend the night planning away.
Every month is different. One month you may need to spend extra, if it’s Christmas or your rent is increasing. It’s important to be mindful of any changes that will be happening to your spending in the upcoming month.
Prioritize your Expenses. Paying off debt should be one your most important priorities. Buying the newest purse or the new Jordans should be put on the sidelines until you are more financially secure. Making your savings higher than 20% during this time should be considered to help pay off your debt faster.
It’s so important to track your progress. The first step is coming up with the budget, but the next step is to ensure you are following through. Try to be mindful of your spending and stay within the range you set for yourself.
I am not a Financial Planner, just a normal guy that loves to budget. My opinions are not law, but merely suggestions. This has worked for me and I hope you found value in my opinions! Do you follow the 50/30/20 rule?
