Unless you were a finance or accounting major in College, chances are you don’t have much knowledge about keeping and maintaining a personal budget. (Don’t get me started on the education system?! How can we pay so much and learn so little?!!? Okay, let me calm down… that’s for a separate post.)
Today, on Adulting 101, we’re discussing…… BUDGETS! Yes, I know its boring, but you neeeeeeed to know this stuff! You’re a grown ass woman (or man) now. C’mon.
A little backstory. My financial situation shifts every once in a while. I have in the past had two jobs which means I have food to buy, a rent to pay, a car to finance and let’s not forget a car insurance. Furthermore, I have friends to visit every once in awhile and a deep desire to indulge myself with wine. Who doesn’t love a good glass of wine?
It can be so hard watching your money drift away in a second after you have worked so hard to earn that cash. Yes, I understand money has to be spent sooner or later, but wouldn’t it be great to have a budget that allows us to use it wisely? Budgets don’t have to be restraining or rigid plans because they mold to our situations.
In this article, I want to offer you some simple tips to plan a budget and actually comply with it. I promise you this won’t be a traumatizing process! And will genuinely better your life.
You must determine your monthly income
How much do you earn each month? To start your budgeting plan, first, you must know how much money do you make. You need to count every type of income you have such as a principal job and side gigs. Additionally, you must know how much are you losing on taxes in every job. Once you know this information make your calculations to determine your monthly income: sum your salary and subtract your taxes.
If your income is unpredictable then look at your calculations from the last 3 months.
You must list your monthly bills
Next step is listing your bills.
Your bills are the expenses you must pay each month: mortgage or rent, health or car insurance, car payment, house bills, groceries, and utilities. This is a simple step just calculate your expenses on each item and then make a simple summation.
List your credit card debts
You must be wondering why I am listing this item as a separate step since credit card bills are also a type of bill. Well, I personally think credit card bills are the hardest one to pay attention and also the hardest one to pay since the interest rate increases like crazy.
Furthermore, this quantity changes depending on how much money you charge on your (precious) credit card, so you have to calculate how much you owe. The minimum payment should always be your goal when you are trying to keep a good credit card. I have an amazing tip for you! Try to maintain your credit card in a good state by paying a little bit more of the minimum payment.
You must follow the 50/20/30 plan
This plan has been recommended by some of greatest economic experts. What does it mean? It means that 50% of your income must be spent on necessities; 20% of your income should be spent on savings and debt repayment; 30% of your income should be spent on your wants.
50% on necessities
First, you must determine which are your necessities.
The most common necessities are car insurance, health insurance, rent, mortgage, credit card, transportation, groceries, medical expenses, and childcare. Necessities vary depending on the individual.
What are the things a must pay each month come hell or high water? These will be the items in which you’re going to spend 50% of your salary.
What do you do if your necessities calculations result in more than 50% of your salary? If this scenario happens then you might want to take some of the money you’re going to use on your wants, at least for a few months.
20% on savings and debt repayment
Second, 20% of your income must be spent on debt repayment but also on your savings.
When thinking about the 20% you should consider two important things: your emergency fund and your retirement fund.
An emergency fund is great when unexpected situations happen; you can start saving by putting at least $500. Next, is crucial to think about your retirement plan.
Part of your salary has to be put on a retirement fund. There are a few ways to do this: a 401(k) plan that every company has o do it on your own. Either way, I completely recommend you to do it since retirement plans are a huge plus when you can’t work anymore. Now, think about toxic debt and debt repayment.
Toxic debt includes credit card debt with high-interest rates and personal loans or title loans. It’s called “toxic” because the interests are so high that you end up paying two times more than what you borrowed. This type of debt must be considered when doing your budget. Furthermore, you need to consider debt repayment. According to Bev O’Shea, “These are payments beyond the minimum required to pay off your remaining debt”.
30% on your wants
This is the room to indulge yourself. You might notice that you can use all your 30% on things to distract you or that you probably need to use some of that 30% for paying your necessities and debts. Remember that a budget is a tool for understanding where is your money going and it shouldn’t be a straitjacket.
Understand your numbers
A budget is about completely understanding your numbers. You’re not accomplishing anything by doing all these calculations and not applying whatever the changes you need. Do you want some help? Ask for a close friend or a family member to help you out.
There you have these great tips! These were some really easy steps you can apply in order to create your own budget. Let’s resume, calculate your monthly income, understand your expenses, apply the 50/20/30 plan, and understand the changes you are applying
Have you applied any of these steps before? And if you had, have these steps helped you to achieve a better financial life? Let me know!