How to Plan Your Budget and Why?
For an individual or a family, the topic of finances can be very tough because from early on in life, we are taught not to share our financial matters with people. That causes us to not talk about it with people and that causes everyone to make the same mistake over and over again.
One of these common mistakes is not budgeting your monthly income and therefore spending more than required or worse, end up in debt.
Budgeting is extremely simple, and you can start it too with the help of a rule called the 50/30/20 rule which was given by Elizabeth Warren in her famous book “All Your Worth: The Ultimate Lifetime Money Plan”.
To follow this rule, you need to first know all about your money and more importantly where you spend it each month.
This can be achieved quite easily by noting down your expenses on an excel sheet or an app like Money Manager or use an app like Mint.com which tracks and shows you all your expenses in perfect neat little graphs.
After you know exactly where your money is being spent, you can utilize the 50/30/20 rule. The rule states that:
50% of your income should be spent on your NEEDS
Needs are the things that you absolutely must pay like your mortgage, rent, car payment, utility bills, groceries, insurance, etc. Make sure not to include entertainment or wants in this category like Netflix, dining in restaurants, etc.
Half of your income should be more than enough to cover all your essential expenses but if you end up needing more than half your income then you should cut it from wants or you should try to downsize your lifestyle.
30% of your income should be spent on WANTS
Wants are the things that are nice to have but are not essential. This can include your subscriptions to Netflix, Prime, dinner, vacation, a new electronic gadget, etc.
Anything in the “wants” bucket is optional if you boil it down. You can work out at home instead of going to the gym, cook instead of eating out or watch sports on TV instead of getting tickets to the game.
20% of your income should be spent on SAVINGS
Finally, you come to the most important thing that can set you up for life. Try to allocate at least 20% of your monthly income into savings and investments. This includes putting your money in a high yield savings account, stock market, ETF’s, IRA contributions, real estate, etc.
Before investing your money, you should ideally save an emergency fund that will contain 3 to 6 months of your monthly income which will act as your insurance if god forbid anything bad happens to you.
The more you save and invest, the faster you can become financially independent and retire early if you want.
When investing, be thorough in your research about where to invest. Try to find the company that’s best suited for your needs and annual yield. This can be a bit tricky but once you get the hang of it, you will find that it is much better to put your money to work in order to get the best results.
Saving is difficult, and life often throws unexpected expenses at us. By following the 50-20-30 rule, you can have a plan for how you should manage your income.
If you find that your expenditures on wants are more than 20%, then you can find ways to reduce those expenses that will help direct funds to more important areas such as emergency funds and retirement.
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