When it comes to a budget, I truly believe that the simpler you can keep it the better. Many times people seem to overcomplicate and get overwhelmed when looking at spreadsheets and graphs. While there is software that is meant to make things easy to manage, I find that it is best to use paper and pencil when first starting out or a simple worksheet (I have included a simple budget PDF at the bottom of this post that you are free to print out and use).
Many people when they begin budgeting either over or under budget for their basic needs, leaving very little for wants and debt. There is something called the 50-20-30 Rule when it comes to budgeting and it is a pretty good indicator of how you handle your finances. I have no idea who came up with the concept but it’s a great tool to figure out if you are over or under spending in certain areas.
Disclaimer – if you are using more than 50% of your income on needs or more than 20% toward your financial goals or debt please note that you are not alone. Many people are in this situation and there are ways to get yourself out of that situation which we have already discussed in previous blog posts or that we will discuss at another time. Just know that you are not alone and that there are ways to fix this for your future.
50% of your income should go to your living expenses and essentials
20% should go toward your financial goals
30% of your income should go toward your flexible spending and savings
So let’s break this down a little bit.
Needs or necessities should include groceries, housing, basic utilities, transportation (not including an auto loan payment), insurance and child care expenses. If your essentials are more than 50% of your income then you need to dip into your wants category until you can either bring in more income or bring down your necessary expenses by negotiating with your insurance or utility companies, shop sales and try to bring down your grocery budget. Please note that needs can include internet, cell phones and basic cable if you work from home, don’t have a landline or don’t have access to broadcast TV.
You do want to make sure you set up an emergency fund with at least 3-6 months of expenses and make sure you are saving for retirement and your children’s college funds. However if you have debt you need to make sure you take care of that first. The truth is, if you pay off debt, you will have more money to put toward savings, needs and wants. Debt tends to make it more difficult to put money away for simple luxuries. Something I do want to make sure of though is that you do put a small amount toward emergencies every month, even if it’s just $5 a pay period. And the reason for this, is that emergencies will happen. Something will come up and I would hate to see you grab a credit card to have to take care of them. So put something away in an easily accessible savings account while you take care of your debt. You won’t regret that decision.
Wants are the things we desire or that make life worth living. They can be simple pleasures like coffee on the way to work from Dunkin Donuts or a meal out with a friend. Or something more extravagant like a date night or even bigger like a down payment on a house. Wants are expenses that you don’t necessarily need in your every day life but give you the flexibility to enjoy and live life. Needs and wants will vary from person to person, but no matter what, when it comes to money and budgeting, sacrifices will need to be made, as most of us don’t have access to unlimited funds.