Sticking to a budget always sounds easy in theory, but you can quickly find yourself falling down a rabbit hole while calculating all the various expenses in your life. Since most of us aren’t lucky enough to have a personal finance expert we can trust enough to take care of all of those debts and credits, it lands on our own shoulders to figure out where our money goes.
It’s so easy to let things slide when you only have yourself accountable for, well, doing the accounting. Some of us might even allow ourselves to ignore our budget entirely until bills start rolling in, only to find that we totally over-did it. This can lead to a whole lot of new problems when you take out loans, credit cards, or wind up in even worse financial debts.
Luckily, organizing your spending habits doesn’t have to be as complicated and overwhelming as many of us fear. It’s really all about breaking your funds down into three basic categories: essential payments, financial savings, and lifestyle expenses. To make things even easier, you can follow the “50/20/30” rule, which splits each of those categories into manageable percentages. Before diving in, however, you’ll want to take a look at your monthly income after taxes to create a more accurate plan. Take a look to see how you can curb overspending with this easy-to-follow system.
50 Percent: The Essentials
As the largest chunk of your monthly (or annual) expenses, this section will include the essential payments you make, like mortgages, car payments, life insurance, groceries, credit cards, and other areas in life with less wiggle room when it comes to spending.
Differentiating between what you actually need versus what you really, really want is the most difficult part of the whole process. Almost anything we purchase can be justified as a vital expense, but that’s where the slippery slope begins. For instance, you might have a monthly subscription to a streaming music service, but that wouldn’t necessarily count as an “essential” cost. Even if you use the service on a daily basis and swear by its ability to help you stay focused at work, you have to admit it’s not exactly on the same level as groceries — and you certainly won’t enjoy listening to your favorite tunes while bumming rides from friends because you’ve missed a car payment.
Don’t worry, we aren’t saying you’ll have to give up all the fun stuff you actually enjoy spending money on. It’s just about shifting your perspective a bit.
20 Percent: The Future and Past
For this section, you’ll have to look at both the past and the future to pay off debts you already have and save for expenses you’ll have in the future. As Chase Bank explains, “Simply setting aside 20 percent of your income for savings can quickly build a safety net in case things go south and expenses increase.”
Thinking about saving money rather than spending it as soon as you have it is admittedly the least enjoyable part of putting a budget together. That said, no matter how much it makes you groan or roll your eyes in the moment, you know that future-you is almost always glad you did this when tough times or other surprise expenses hit.
OK, so when do you get to actually spend money on things you like rather than all this responsible stuff? Keep reading to finally get to the good part.
30 Percent: The Fun Stuff
Now that you’ve got all the bills, savings, and debt payments out of the way, you can finally kick back with the things you want, not just need — and look, it’s even a little bit more than you put back for savings!
Feel like splashing out on a fancy dinner once in awhile? This is the section you’ll look at to see how many lobsters you can order. The only thing to keep in mind is that because this is the area of funds that is relegated to non-essentials, you can’t prioritize it as highly as the previous two. Again, regular groceries realistically are more important than going on vacation, but there’s nothing that says you can’t have both. It’s all about balance, after all, so don’t feel guilty about dipping into this chunk of cash when you can.
You can also adjust each section to better fit your own personal financial needs. Maybe you have more debt than your actual bills and need to raise the percentage of your savings section a smidge. Whatever the case, organizing your budget into these three main areas will help lessen your stress levels and keep you on track moving forward.