How To Set Budgets
A better budget in three easy steps:
I get it, budgeting is hard, and while the 50/20/30 rule is great, it doesn’t work for everyone. If spending less and saving more is a resolution you struggle to stick with, a goals-based budget might help do the trick.
Here are three steps to kick your 2021 savings plan into high gear:
1. Set some goals.
Firstly, it’s critical to understand what’s important to you. Are you striving for a long-term goal like financial independence? Maybe your goals are more immediate and revolve around becoming debt free or taking a dream vacation. Or maybe it’s important for you to save and help pay for your child’s education. Whatever your goal(s) may be, set a specific timeframe to achieve them, and write them down. Researchers say you’re 42% more likely to act on your goals if you write them down.
2. Track where your money is going.
It’s important to have an understanding of where your money is going currently if you’re going to enact some changes. It’s hard to save if you don’t know how much you are spending. To get started, first gather all of your financial statements for your credit/ debit cards and checking accounts over the last six months. Take a monthly average of all of these outflows to get a good picture of how much your variable expenses are (ex. eating out, bar tabs and shopping that changes each month). This way you have an objective measure of all the items you have been buying instead of measuring an amount going forward when you know you are keeping tabs.
3. Make your budget.
- The stuff you need: Out of all the money that hits your checking account, a majority of it goes to the things you need, like housing, food, and transportation. There’s a good chance most of these costs are fixed, but there may be some opportunity to free up some space in your budget by cutting back on eating out or reexamining your priories as it relates to where you live or what you drive.
- Goals: These are the things from step 1 that you want to direct more of our hard earned money towards. Maybe you’re already directing some dollars toward monthly savings or making payments on student loan debt, but we want to direct more to this area. After all, these are the things you want to achieve and most valuable to you!
- Other stuff: These are the things that we don’t necessarily need or want, and if you’re like me, they usually get delivered to my front door. It may be tough to part with some of the spending in this category, but you also have to ask yourself what’s really important, your beloved streaming service or a down payment for a new home.
Is there any ongoing savings ability based on this amount compared to your after-tax pay?
Successful young investors will be saving close to 15% of their pre-tax income towards retirement if their employment situation allows it.
See what fat you can trim from your budget you just made to see where you can save! Also, plan for expenses you know are coming in a few years (home improvements, major vacations, children, etc.) and make adjustments as early as you can so you are able to maintain your savings level.