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By Sarah Klein — Published April 11, 2018
Creating a budget helps to ensure that you aren't living beyond your means. It factors in your nonnegotiable expenses, savings, and (hopefully) still leaves money left over for you to do the things that you want to do in life. It is a smart way to get out of and avoid debt while saving for the future. According to recent data, only 39% of Americans say that they could handle an unexpected $1,000 expense. The general recommendation is to have at least enough money saved to cover the bare necessities for a few months. This budget guide will help you get your finances on track. While developing a budget takes some work upfront, the result is a stress-free financial future.
Determine How Much Money You Have Coming In
This may sound easy, but keep in mind that this is not actually your gross salary. Look at your most recent paystub to determine your pay after taxes and Social Security. You can add back in your payments to retirement accounts and insurance if you have so that you can get a clearer idea of how your money is being spent further along in this budget-making guide. If you receive money from any other sources (such as freelance work) take that into account as well, minus taxes paid.
Track Your Spending
Look at bank and credit card statements to help you determine where your money is currently going. Make a list of fixed expenses such as rent, mortgage, basic utilities, car payments, insurance payments, etc. Don't forget fixed expenses that aren't paid monthly, such as the cost of getting your car's oil replaced every three months. Divide it by three, and you will get the amount as a monthly expense. If you have loan payments you're making, also add that in. Next, create a list of your variable expenses such as food (both groceries and eating our), gas, and entertainment. The idea is to account for every expense. Now subtract your expenses from your net income to get an idea of your financial health status. Are you surprised by how much you are spending in comparison to what you're earning?
Use a 50-30-20 Budgeting Distribution
The 50-30-20 budgeting distribution divides your budget as follows: 50% for necessities, 30% for desires, and 20% for savings and debt repayment. This is where you can use the data that you acquired from the second step in this process. Cross off your expenses as you place them each in the following categories to make sure that you don't miss anything.
In the 50% category for necessities, include basic utilities, your rent/mortgage payment, insurance, groceries, transportation, and minimum required loan payments. Keep in mind that the amount you spend on groceries can be negotiable if this seems high to you. On the other hand, you may want to budget more for groceries if you are used to eating out often, since cooking at home can often save money. You also may be able to get a cheaper insurance plans, cell phone rates, or reign in your energy usage if you find that more than 50% of your income currently goes to necessities. If you have a lot of debt, you may find that the minimum payments push you up to above 50% of your net income. Keep in mind that this will change over time as you pay down your debt. In the meantime, unfortunately, you'll just have to cut back a bit from spending 30% of your income on desires.
In the 30% category for desires, include entertainment (yes, even Netflix), meals out, coffeeshop purchases, shopping trips (new purses and shoes not because you need them but "just because"), and travel. Some things you will really have to think about to determine whether it is a need or a want. One way to make sure that you stick to spending only 30% of your income on desires and not exceeding it is to withdraw 30% of your net income in cash at the beginning of each month. Once you've spent all of the cash, you'll know that there is nothing left to spend on discretionary wants for the rest of the month.
20% Savings/Debt Management
Finally, 20% of your income should go towards savings and debt management. Savings are going to take the form of both a savings account and a retirement account. For your retirement account, you want to make sure that you take advantage of the highest employer match offered. This is free money, so find out what percentage that is and make sure that you contribute so that you can take advantage. If you have any debt to repay (such as credit cards, student loan payments, and car payments), this is where you will contribute money to pay above the minimum payment amount that was counted in the 50% necessities category. Getting rid of debt is going to do a lot for your stress level and improving your financial wellbeing. Finally, you need to start a savings account for emergencies that crop up, such as unexpected car repairs or medical bills. You can set up automatic monthly transfers from your checking account to a savings account so it will be one less thing for you to even think about. Plus, savings accounts offer a small amount of interest, so you will be making a little money on your savings.
You need to be able to track your progress as you manage your budget. You can do this several ways. One is to use a free or paid budgeting app. Some automatically connect to your bank and credit card accounts and categorize your spending for you. Many banks also offer budget tracking on their websites. Finally, you could create your own spreadsheet to track your finances or even carry a notebook to record your spending by hand. You may choose to document your spending each day as you go or set aside a time each week (such as Sunday evening) to update your expenses and adjust as needed. It's important to keep checking in to ensure that you stay on track with your budget. You should also go back to your budget and make adjustments as things change, such as if you get a raise or experience another major life development, such as having a baby.