A budget can be a simple and effective way to keep track of your spending, saving, and everything else that falls in between.
Creating a budget can be challenging, but actually sticking to it can feel outright impossible some days. But it doesn't have to be. Using the answers to the following two simple questions, you can increase your overall financial fitness and improve your ability to do more than stick to your budget - you can master it!
Where Am I Right Now?
The best starting place for any financial journey is simple: start where you are, at this moment. When you understand your current situation - its liabilities and its resources - you'll be starting on the right foot. And that means looking at your net income.
Your net income is the amount of money you have left over after all withdrawals, insurance premiums, taxes, and retirement contributions have been taken out.
Once you know your net income, you will have a better picture of how much money you can afford to spend each month. Set aside a little time each day before turning in to record the money you spent that day. At the end of the month, you'll have an accurate snapshot of your finances.
Budgeting Strategy: The "50-25-25" Rule
This approach categorizes your expenses into three groups: Fixed, Financial Targets, and Variable.
Fixed Expenses: 50%
The expenses you can't change (or can only change very minimally) are called fixed expenses and include things like rent, mortgage, utilities, essential groceries, or transportation.
Financial Targets: 25%
Non-tangible items that play a vital role in your financial future like debt or student loan repayment, emergency funds, investments, and so on, are considered financial targets.
Variable Expenses: 25%
Variable expenses are those things we typically want, as opposed to things we really need. We typically have a certain amount of flexibility in their overall amount. Items including hobbies, group membership fees, eating out, discretionary spending, and so on will typically end up here.
Am I Spending To Achieve My Goals?
Now that you know how much money you're paying out in each of the three categories above, it's time to decide if your spending choices align with your financial goals.
Are you hoping to make a big-ticket purchase, like a new home? If you are, it's crucial to think about how much you're spending monthly on your wants versus needs.
It can even be worthwhile to explore ways to reduce your current fixed expenses: would having a roommate to reduce monthly rental costs? Could you move to a less-expensive neighbourhood? A smaller home? We can often find options we overlooked the first time around.
Once you've carefully examined your monthly spending habits, it's time to compare expenditures to your net income and make sure you aren't spending (putting out) more money than you're bringing in. That also means making sure you’re not paying more than you have to for things like insurance premiums or your mortgage. Compare mortgage and insurance rates to make sure you’re saving as much as you can. Living at or below your income level is crucial if you want to achieve your goals.
Budgeting is necessary for your financial stability. With planning and practice, you'll be mastering your budget in no time.
