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Financial Health

The Basics Of Budgeting Money

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How to budget money

  • Calculate your monthly income, pick a budgeting method and monitor your progress.

  • Try the 50/30/20 rule as a simple budgeting framework.

  • Allow up to 50% of your income for needs.

  • Leave 30% of your income for wants.

  • Commit 20% of your income to savings and debt repayment.

FIGURE OUT YOUR AFTER-TAX INCOME

If you get a regular paycheck, the amount you receive is probably it, but if you have automatic deductions for a 401(k), savings, and health and life insurance, add those back in to give yourself a true picture of your savings and expenditures. If you have other types of income — perhaps you make money from side gigs — subtract anything that reduces it, such as taxes and business expenses.

CHOOSE A BUDGETING PLAN

Any budget must cover all of your needs, some of your wants and — this is key — savings for emergencies and the future. Budgeting plan examples include the envelope system and the zero-based budget.

TRACK YOUR PROGRESS

Record your spending, there are plenty of apps to choose from to fit your needs.

AUTOMATE YOUR SAVINGS

Automate as much as possible so the money you’ve allocated for a specific purpose gets there with minimal effort on your part. An accountability partner or online support group can help, so that you’re held accountable for choices that blow the budget.

REVISIT YOUR BUDGET AS NEEDED

Your income, expenses and priorities will change over time. Adjust your budget accordingly, but always have one.

Try a simple budgeting plan

Try the popular 50/30/20 budget. In it, you spend roughly 50% of your after-tax dollars on necessities, no more than 30% on wants, and at least 20% on savings and debt repayment.

Over the long term, someone who follows these guidelines will have manageable debt, room to indulge occasionally, and savings to pay irregular or unexpected expenses and retire comfortably.

Allow up to 50% of your income for needs

Your needs — about 50% of your after-tax income — should include:

  • Groceries.

  • Housing.

  • Basic utilities.

  • Transportation.

  • Insurance.

  • Minimum loan payments. Anything beyond the minimum goes into the savings and debt repayment category.

  • Child care or other expenses you need so you can work.

If your absolute essentials overshoot the 50% mark, you may need to dip into the “wants” portion of your budget for a while.

Even if your necessities fall under the 50% cap, revisiting these fixed expenses occasionally is smart. You may find a better cell phone plan, an opportunity to refinance your mortgage or less expensive car insurance. That leaves you more to work with elsewhere.

Leave 30% of your income for wants

Separating wants from needs can be difficult. In general, though, needs are essential for you to live and work. Typical wants include dinners out, gifts, travel and entertainment.

It’s not always easy to decide. Is a gym membership a want or a need? How about organic groceries? Decisions vary from person to person.

If you’re eager to get out of debt as fast as you can, you may decide your wants can wait until you have some savings or your debts are under control. But your budget shouldn’t be so austere that you can never buy anything just for fun.

Every budget needs both wiggle room — maybe you forgot about an expense or one was bigger than you anticipated — and some money you’re entitled to spend as you wish.

Your budget is a tool to help you, not a straitjacket to keep you from enjoying life, ever. If there’s no money for fun, you’ll be less likely to stick with your budget — and a good budget is one you’ll stick with.

Commit 20% of your income to savings and debt repayment

Use 20% of your after-tax income to put something away for the unexpected, save for the future and pay off debt. Make sure you think of the bigger financial picture; that may mean two-stepping between savings and debt repayment to accomplish your most pressing goals.

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