ONCE YOU KNOW YOUR FINANCIAL REALITY: YOU’VE ASSESSED YOUR FINANCIAL MINDSET AND YOU SET YOUR GOALS, IT’S TIME TO CREATE A BUDGET
Once you know your financial reality; you’ve assessed your financial mindset, and you set your goals, it’s time to create a budget.
I know – budget is a ‘dirty’ word. No one likes it, but it’s necessary. A budget is a roadmap for your money. Without a map, your money doesn’t know where to go.
So what directions should you give your money? Here are a few of the most common budgets.
You know how much money you bring in, but how do you allocate it? Setting a budget may seem overwhelming.
As you stare at your funds, you wonder how much should you save? Do your bills take up too much of your income? How much should you use to pay off debt?
THE 50/30/20 BUDGET HELPS PUT THIS IN PERSPECTIVE.
- 50 percent of your take-home pay should cover your ‘needs.’ This includes anything necessary to live safely. Your mortgage or rent, utility bills, clothing to keep you warm or cool, insurance, and minimum credit card payments are needs.
- 30 percent of your take-home pay covers your ‘wants.’ This doesn’t mean freedom to go on shopping sprees. Many things fall into ‘wants’ or ‘unnecessary things,’ such as your cable bill, extra’ clothes, eating out, entertainment, magazine subscriptions, or travel.
- 20 percent of your take-home pay covers your savings and
debt. Split it up accordingly between paying off your credit
card debt (this is beyond the minimum payment which falls in the needs), filling your emergency fund, and saving for
- 70 percent of your take-home pay covers wants and needs. Call it your living expenses and figure what out you consider essential for living. This will differ by person. There’s no judgment. You do what’s right for you.
- 20 percent of your take-home pay covers savings. Save 10 percent of your income in your retirement fund, 5 percent in emergency savings, and 5 percent in accounts for specific goals (vacation, home down payment, college savings, etc.).
- 10 percent of your take-home pay covers debt repayment. This includes all loans, whether student loans, car loans, or credit cards.
THE DETAILED BUDGET
If you’d rather not have categories holding you back, consider the Detailed Budget. Rather than using categories, you give every dollar a ‘job.’ You should be left with nothing in your spending account at the end of the month.
This doesn’t mean you’re broke; it means you assigned every dollar a job which should include paying for your needs, wants, debts, and savings. You have more freedom with the Detailed Budget, but it also leaves room for overwhelm, so choose this method carefully.
No matter what budget you choose, give yourself some grace. Don’t expect perfection right off the bat. Everyone makes mistakes – it’s a part of life. If you learn from those mistakes and pick up the pieces, you’re moving in the right direction.