Most people don’t sit and think about how to budget their money. Over 60% of Americans are living paycheck-to-paycheck (Steele, Martin 2023). Though having to do with income, a big reason is lack of proper budgeting. Budgeting helps you set your spending limits so that you don’t run out of money. The problem is budgeting is not taught in school and it’s necessary to know. Whether you’re a working adult or a student trying to save money, it’s never too late to learn good budgeting habits. But how do you start? There is no one way of doing it, and there are a lot of opinions out there on how to budget. This blog will provide the basis to help you atleast get started with some easy and helpful tips.
How to budget money: 50/30/20 rule
Before budgeting your money, it’s first important to track your income. A common rule of thumb used for managing your monthly income is the 50/30/20 rule. This rule states 50% of your money should go towards needs (unavoidable expenses like gas, rent, groceries, etc.), 30% should go towards wants (avoidable expenses like video games and beer), and 20% should be saved for emergencies (car repairs, medical accidents, extra cash incase of job loss, etc.). It is worth noting that this rule is a general rule, take it with a grain of salt.
Write your expenses down
To understand how much money you can afford to spend, start tracking your expenses. This is a crucial step for budgeting money. There are some expenses which you will find will be avoidable, while there are some that aren’t. For example, buying gas for your car, groceries for food, or paying rent is unavoidable. Every time you get gas, write down how much it came out to. I use my notes app on my phone to keep track of how much I spend on anything in a given month. When the list gets long, I transfer the list over to google sheets.
I like google sheets because I can list my expenses and also use it as a calculator. You don’t need to do it this way, do whatever works for you. Any way you do it, listing your expenses will give you an idea of how much you spend on necessities in a month.
You should also keep track of avoidable expenses. An example of avoidable expenses is spending money on things we do for fun. Even though spending on fun things is avoidable, it doesn’t mean we want to avoid it! But I find that writing down my avoidable expenses helps me think twice before spending money on something I don’t need (ex: doordash order I know I’m going to regret).
Calculate leftover money
Subtract your monthly income by the money coming out in a given month. This will tell you how much money you have left over for the month. A big red flag here is if this value is negative. That means you’re spending more than you make! If you’re in this position, it’s okay, but it’s time to fix this. We’ll talk about tips/tricks to cut expenses in another blog. If you have money leftover after making this subtraction, that’s great! But you’re not done yet.
Rinse and repeat
To refine your budget, calculate your leftover money over the duration of four months. This will give you an average of your monthly leftover cash. If your leftover money in later months is less than your 4-month average, then you went over budget. If your leftover money is more than expected, that’s a good start. If you are using the 50/30/20 rule of thumb, you should shoot for your leftover money to be at least 20% of your monthly income.
Give yourself grace
In the first four months of figuring out your leftover money, allow yourself to make mistakes. It’s okay if you go over budget while trying to figure out what your average monthly leftover money is. Also, cut yourself some slack when going over budget even after the first four months. Being a few dollars over budget provides a lesson on how you should reduce your spending for the next month.
Don’t overstress, just start budgeting money
It’s common to get stressed about budgeting your money, and instead there’s a temptation to do nothing. That’s a big reason why over 60% of Americans are living paycheck to paycheck. The best thing to do is to act now and start your budget.
If you track your monthly expenses and have a goal for leftover monthly cash then youre in a good spot. Join along this blog weekly to learn best tricks/tips to start taking control of your money.