Why is Budgeting important
Let’s be completely honest: there’s no way you’re going to budget yourself out of poverty. It’s just not going to happen… However, if you don’t learn to how budget and optimize your money NOW, you’ll always feel like you’re losing. It won’t matter if you have $100 or $100,000. In this post, I want to introduce to you one of my favorite ways to budget which is by using Elizabeth Warren’s 50:30:20 Budgeting Rule!
The 50:30:20 budgeting Rule
Senator Elizabeth Warren coined the 50:30:20 budgeting rule in her book, All Your Worth: The Ultimate Lifetime Money Plan. Basically 50% of your after-tax income should be for NEEDS, 30% for WANTS, and 20% for SAVINGS and REDUCING DEBT. This is a great way to organize your money and make sure everything is accounted for. **These percentages should come from your AFTER-TAX income.
Obviously, a need is a REQUIREMENT, or the things that you need in order to survive. This should include rent, car payment, groceries, gas, minimum debt payments, insurance, health care, etc. This should be the easiest section because it’s probably consistent of all the things you hate spending money on!
If you’re finding it hard to keep your needs within 50% or less of your income then it might be time to DOWNSIZE. This section is hard to work around and already takes up too much space in your wallet so keep this in mind when looking for places to live and cars to buy.
Now to the fun stuff! These are the things you say you can’t live without but you really can. Think about vacations, eating out, that new tote bag, Disney+ & Netflix subscriptions, etc. These are also the little things that make life a little better. Don’t feel like you should cut everything out of this section because you don’t want to be miserable and broke. But keep in mind that if anything takes a hit first it should always be this area. So, if the NEEDS actually end up being 65% of your income then you might want to cut this down to about 15%.
Since needs and wants can overlap sometimes, Nerd Wallet explains the difference between the two. Click here to learn more!
20% SAVINGS AND DEBT REDUCTION
To be honest, you can’t save your way out of poverty either BUT, you can INVEST your way out. Today it’s way harder to take out a 10k business loan than a 10k student loan, so when you do start investing you’ll probably need your own money to start. Which means you should start building those savings ASAP. Whether you’re looking to invest or not, you should always have a growing savings account. Start extremely small when saving so that you can build discipline. If you can only save $5 this paycheck, start there! Next month try to save $10 and keep building form there. The most important thing is to never dip into your savings!
Also, remember that the MINIMUM debt payment should be in your needs. So, if you have to pay $25 for your credit card each month that should have already been allocated for in your NEEDS. But if you want to pay more than that off, (which you always should) then this is the section where you would do it! Learn more about credit cards by clicking here!
TIPS FROM A MONEY GURU
The Money Guru, Taryn Bushrod, also had some words of advice to give when it comes to budgeting and getting your finances together! She helps millennials with their money relationships and spending habits. So, check out her page when you get a chance! She can be found on Instagram @itstarynsworld and also on her website: www.tarynsworld.com.
“The best budget advice that I can give to anyone is to learn how to manage your money and not just a budget. When you can manage your money you are in control but when you solely live by a budget your money is in control of you. One of the easiest and effective ways to manage your money is by using percentages to maintain your living expenses, financial goals (debt repayment, savings, investing) and flexible spending. The actual breakdown depends on your earnings and total expenses but it’s typically 50/20/30. (50% living expenses, 20% financials goals and 30% flexible spending.)
Once you have your percentages calculated, identify your money management system. This is where you determine if you best manage your money by using cash, a bank card, or even a prepaid card which I find is easier to track in percentages. This is a critical component to managing money and for most people it takes some trial and error to figure it out. This is something that will help you shift your money mindset and take control of your finances.”
THINGS TO REMEMBER WHEN BUDGETING
The best time to budget is right before you get paid. This will force you to plan before you even spend a dime.
The more you plan, the less you’ll have to worry. It’s easy to spend money when you forget all the things you have to pay for that month. Think of how many times you have to get gas before you get paid next, if you need to get your nails done or a haircut, or if it’s a friend’s birthday month.
Remember, YOUR budget should reflect YOUR spending. Don’t get too caught up in trying to make your budget look perfect or like the next person’s because it shouldn’t. As long as the budget keeps you making SMART decisions, then it did everything it’s supposed to.
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