You’ve heard it time and time again — you need a budget. But why do I need a budget? And how do I create a budget? In short, a budget is a plan to how you spend your income. We’ll share our technique for creating a simple budget. You likely have plans for other parts of your life — why not create one for one of the most important areas.
Do you need a budget?
- Do you spend money and hope you have enough to meet the next paycheck?
- Do you wonder if you’re saving enough?
- How much are you spending on things you MUST have versus things you like to have?
- Do you have an emergency fund? (in case a financial emergency happens…)
A budget is very important
Unfortunately, according to Gallup, only 30% of adults polled have a budget. Their survey also found that 30% of adults also had taken the time to create a long term financial plan with savings goals.
The 70% of people who don’t have a budget, are just hoping they’ll get there. But without a plan. This is like jumping in the car and driving to the other side of the country without a map — hoping eventually a road will take you there. Some people will make it, but most likely will not.
We’ll share with you a few tips on creating a simple budget.
A simple budget technique
Here’s a step by step approach to create a simple budget. We believe in starting with a simple budget first. In future articles, we’ll discuss different budgeting options, applications, and further budget honing. Start here and do an inventory of your income and spend.
- What is your take home income?
- Make a list of all the after tax income you get on a monthly basis. This includes any side income, alimony, etc.
- This is your starting point.
- List your required expenses
- These are costs / expenses you have that you absolutely must pay.
- Examples of these include utilities (gas, electricity, water), gasoline for your car, car payment, home payment, food, debt (including credit card) etc.
- This is not things you can choose not to do: restaurants, movies / entertainment, etc
- If you don’t know these, you can look at your bank statement, or make a list one month on everything you spend.
- List your should have expenses
- These are costs that are not mandatory to live
- Examples: Television, internet, cell phone
- List your nice to have expenses
- These are costs that are fund to do but not required or necessary
- Examples: movies, restaurants, entertainment, vacations, etc
- How much are you saving to an emergency fund (should have an absolute minimum of $1,000 but ideally 3-6 months of pay)
- How much are you saving for retirement?
Your Simple Budget
- Add your expenses together and compare to your income.
- Is your expenses less than your income?
- Are there items on the expense list that you can reduce / eliminate?
- Creating the budget (50/30/20 plan)
- 50% income mandatories: Your mandatory spends should be no more than 50% of your income. If it is higher, you should re-look at how you can reduce some of these. (except for credit card debt – see below). Update your spend list so that you meet this general goal.
- 30% income should/nice to have: You should not be spending any more than 30% of your total income on this area. Update your spend list so that you meet this general goal.
- 20% income for savings / debt: Use this piece for paying down your debt (including credit card) and for savings. Modify your spend so that you are saving money for an emergency fund (rainy day fund).
- You must have an emergency fund.
- You should be saving for long term — retirement, future needs.
- Credit card debt: YourFinances does not believe in having credit card debt because of the high interest rates and our belief to not not spend money that we do not have. We save for those items.
MOST IMPORTANT: Track this new budget on a daily, weekly, monthly basis to ensure you are complying with your new habits.
What do you think?