Planning a Budget
In a perfect world, everybody would have enough money to pay for everything they need. Most of us don’t have that luxury, and need to plan out how to spend our money. We do so by planning a budget. If you’ve never set a budget up for yourself before, a good place to start is the 50-20-30 model. With the 50-20-30 budget model, your expenses break down like this:
- 50% of your money goes to cover essential expenses; the things that absolutely must be paid every month. Rent/mortgage payments, transportation (car payments, gas, public transportation), groceries, utilities, and phone bills all fall into this category.
- 20% of your money is set aside to help you reach an important financial goal. If you’re trying to pay off debt, set up an emergency savings fund, save for retirement, or to save for a child’s college education, this is what will help you reach your goal.
- 30% of your money goes to cover miscellaneous costs that don’t fall under the “essential” category. This would include things like clothes, going out to restaurants, charitable contributions, subscription services (Netflix, Hulu Plus, Birchbox, etc.), and other entertainment expenses.
Before you start trying to plan any budget, you need to figure out how much money you take home every month after taxes. Work from that figure to determine the 50-20-30 amounts. If you’re self-employed, start with your net gross income minus taxes and business expenses.
If you’re looking for ways to save money, your 30% category should be the first place you look. Since that category is meant for non-essential expenses, it will be easy to find things to cut there. Although you might be tempted to reduce that 20% category instead, remember how important those goals are in the 20% category, especially if you’re trying to pay off debt.
Since everyone’s financial needs are different, this model is just a guideline and can easily be adjusted as needed. For example, the 50% for fixed expenses guideline is based on the assumption that you have sizable expenses like rent or mortgage payments to make every month. So if you own your home outright, your essential expenses might total less than 50%. As long as you have the money left to work with, you could contribute more to the 20% and 30% categories.