In today’s day and age there are so many things to do, places to be, and most importantly stuff to buy. It’s really easy to spend your money mindlessly on items you like. However, this kind of spending habit could lead to serious financial troubles in the future. So, it’s important to keep track of what you spend. Planning out and allocating your resources wisely allows you to have fun and secure your financial freedom! Budgeting is one of the most fundamental finance tools at your disposal, so let’s take a crash course on how to budget your money…
The beginning step to managing your money is planning ahead on how you want to use it. Think of all the expenses you have that are mandatory each month. Bills like: credit cards, rent, utilities, groceries, etc… are common ones to have but anything that repeats every month is definitely an expense to keep in mind. You should always allocate enough money to pay these off on time every month. Next, take your yearly income after tax, and divide it by 12 to get your monthly budget. Now that you have your monthly budget it’s fairly easy to tally up your mandatory expenses and allocate the proper amount to them. Once you have this part of your budget figured out, you’re halfway to handling your money like a professional!
Slicing up the Pie
Now is the fun part in managing your money. After accounting for mandatory expenses, you can now allocate your budget to anything you want! That being said, I’ll go through the most popular allocation in budgeting. This is the 50/30/20 budget. This means 50% of your budget goes to mandatory expenses, 30% is for fun, and 20% is for savings. This allocation is fairly balanced and accounts for two important items. Saving for the future and having fun. Yeah, having fun is an expense you should account for. Not only will it allow you to track what you usually spend your money on but it will also help prevent you from overspending. A budget not only helps you plan for every month but also keeps you from spending on things you don’t need. Also, savings is a very important allocation too. Life isn’t perfect and no one really knows what tomorrow will bring. Thus, it is vital to have money stored away in a “rainy day” fund and put some money away for retirement. Overall, the 50/30/20 allocation is good for living within your means while still saving for the future and having fun along the way… And that’s budgeting in a nutshell.
My Thoughts on Allocation
Although the 50/30/20 method is balanced, I like to be more frugal and allocate more towards saving and investing. In my eyes, saving and investing yields so many future benefits I can’t resist putting more towards those. For me, my allocation would look like 50/10/40. My allocation is a little extreme and it’s not for everyone. I find lots of value in saving and investing plus I have some fun when I invest so I feel comfortable contributing more. In addition, I’ve found my “fun money” can be spent on similar things but for much cheaper. For instance, going out to dinner for noodles. I find it more fun to buy the ingredients myself and try to cook the meal to restaurant quality. Doing this is what I find fun, makes me a better cook, and happens to be cheaper.
My big point here is everyone is different. Everyone has their own expenses, needs, and wants. So you don’t have to follow the popular allocation method or mine. Make your own allocation according to your interests and dislikes. The popular allocation method is a great starting place to begin budgeting and learn more about yourself financially. Overtime you can adjust your budget to what is best for you. The most important part is that you begin to manage your money. Actively managing your money puts you in the driver’s seat of your financial vehicle and helps bring you closer to financial independence!