Budgeting implies that you don’t have very much money when in fact it just means that you are paying attention to where you money is going. It doesn’t mean you have to stop doing the things you love, it only means that you become more aware of how much you are spending on the things you love and enjoy doing every month. By having that knowledge, you will feel more in control of your future because you will know where you stand in reaching your goals. Who doesn’t want that?!
Step 1: Know How Much You Make
Before you know how much you can spend, you must first know how much you make. Let’s say your employer pays you a salary of $50,000. That may sound like you have enough to cover your bills (plus plenty of leftover to spend) but you must not forget about taxes, insurance, and any other deductions that may be taken out of your paycheck. There may be 401(k) deductions, a flexible spending account, or a myriad of other deductions taken out before you see your paycheck deposited. You can either take a look at your last pay stub and multiply by 2 or estimate your take home pay as two-thirds of your gross pay.
Example: $50,000 / 26 pay periods = $1,923.08 | $1,923.08 x 2 = $3,846.15 monthly gross | $3,846.15 x .67 = $2,576.92 monthly net
Step 2: Understand Your Spending
Take a look at last month’s bank statement and write down every bill paid, every coffee purchased, and any thing else listed. This isn’t about what you would like to spend going forward, this is about what you have already spent. To get a more comprehensive picture, take a look at your last 3 bank statements to get a better estimate.
Step 3: Categorize Your Spending
Now that you listed all of your spending, separate those into 3 categories. The first category is for fixed expenses. Fixed expenses are those recurring bills that you have every month such as housing, utilities, transportation, groceries, and childcare. Next is a category for financial priorities. This includes things like savings, retirement, and payments towards debt. Lastly is a category for discretionary spending. This is monthly spending that is not required but more about what you choose to spend your money on every month such as coffee, dinners out, and Target shopping sprees.
Step 4: Know How Much You Should Be Spending
You may be making enough every month in order to cover your bills and your spending, but do you know how much you should be spending in each category? Do you know whether you are saving enough in order to reach your goals or are you stretched too thin? There is a simple guideline to follow so you know whether you’re spending too much. It’s called the 50/20/30 budget rule and it simply stands for the percentages you should be spending on each category. No more than 50% of your net income should be going towards fixed expenses, 20% should be going towards financial priorities, and 30% is yours to do what you wish.
Example: Going back to a $50,000 salary, breaking that down to a $2,576.92 monthly net income would be budgeted as follows
Net Income: $2,576.92
Fixed Expenses: $1,288.46 (for your housing, utilities, transportation, groceries, and childcare)
Financial Goals: $ 515.38 (for saving, retirement, and paying down debt)
Discretionary: $ 773.08 (for spending on the things you want!)
Step 5: Automate Everything
If you’re just getting started with budgeting, or if you’re not very good at budgeting, the best thing you can do is automate everything! Our family has 3 accounts, 1 for each category, that has a direct deposit going in split among the accounts based on the above percentages. There is never a question as to how much much we have left to spend on the things we want because we simply just have to look at the spending account. If your spouse typically spends more than you, withdraw the cash out of your spending account and split it between you and your spouse. No more resentment, no more arguments, and peace of mind that your reaching your goals!
Disclaimer: I am a CERTIFIED FINANCIAL PLANNER TM (CFP®), but I am not your CFP® or financial advisor. The information in this article is for general informational and entertainment purposes only and does not constitute financial advice. This article does not create a financial planner-client relationship. The author is not liable for any losses or damages related to actions or failure to act related to the content in this article. If you need specific financial advice, consult with a licensed financial advisor, CFP®, or tax professional who can tailor advice regarding your specific circumstances. Additionally, sometimes I use affiliate links to support my website. This means I may earn a small commission, which is no additional cost to you, for referring and discussing products and services that I personally use, or have used and trust. Thanks for your support!