How to Budget Your Monthly Expenses With a Method That Lasts
Budgeting shouldn’t feel like a complex imprisonment or restrain you from having fun and enjoying life. If a budget is too complicated, feels totally restrictive, doesn’t plan for emergencies or isn’t realistic, it will typically fail in just a few short months. According to Novi Money, 60% of Americans couldn’t cover a $1,000 major unexpected expense without going into debt. 78% of Americans live paycheck to paycheck. CBN News reported 1 out 3 Americans don’t use a budget but 93% say everyone needs to. One little bump in the road could derail an entire household’s financial health. Without the safety net of a savings plan it could take years to escape or recover if something were to happen.
For the ones who are new or intimidated by budgeting, ReScore recommends the 50/30/20 Buget Plan developed by Elizabeth Warren, a senior U.S. Senator from Massachusetts and renowned expert in bankruptcy law. This plan is simple for individuals who want a budget that is easy, effective and nearly effortless to execute. It is the best of both worlds; it offers guidelines for enjoying your income while putting savings on auto polite.
Humans tend to ditch things when they become over complicated or frustrating. The 50/30/20 budget guidelines are simple and easy to use. Designing a budget based on percentages works with every income level. If you make between $7.00 an hour up to $50.00 or more an hour this budget can work for you.
This percentage-based budget divides up your monthly income into percentages that go toward your expenses, savings, debt and disposable income. The percentages are calculated after taxes and payroll deductions such as health insurance and 401(k) are deducted from your paycheck.
THE 50/30/20 BUDGET RULE
50% – Needs, Necessities & Living Expenses
This includes rent, mortage, utilities, groceries, car payment, car insurance, childcare, student loans, cell phone bills, insurance premiums, prescriptions, minimum loan payments. Anything beyond that goes to the savings and debt repayment bucket.
30% – Nice to Haves, Wants & Personal Spending
These are the extras that aren’t essentials to living and working including monthly subscriptions, travel, entertainment, meals out, shopping, gym membership, furniture, hobbies. This is also where you pull from if your living expenses exceeding the 50% or if you need to pay down high interest maxed out credit cards until the balance is 30% or below of the limit.
20% – Savings & Debt
This includes money goals, retirement, emergency funds, investments, debt reduction payments and money for the future. This is the amount you put away for rainy days and to prepare and better your future with. It’s important to keep your goals realistic. One of the best kept secrets to saving is finding ways to make it automatic. Don’t put yourself in a position of deciding how much to save per paycheck. This is a slippery slope. Make the savings decision one time and ride it if possible.
- Start an emergency fund and determine how much you need to save in your emergency fund (3 months of expenses is ideal)
- Pay down debt (high credit card balances or student loans)
- Savings for a retirement fund, investment funds, IRA’s, etc.
Step 1: Determine the right tools to assist with your planning, executing and sticking to your budget
- Basic Excel Spreadsheet
- ReScore’s Free 50/30/20 Budget Worksheet
- Good Old-Fashioned Notebook, Pencil & Calculator
Step 2: Based on your expenses, determine your dollar amounts for each bucket
Often, low credit scores develop because of poor budgeting and planning. Hiring a budget coach can help identify areas that could be improved upon and more importantly actually teach you or your spouse how to follow and maintain a budget. A budget coach typically cost around $175 to $300.
For example, after taxes and payroll deductions if you bring home, the below amounts your monthly budget should be allocated according to the following:
$2,500 per month
- 50% Living Expenses $1, 250
- 30% Wants $750
- 20% Savings & Retirement $500
$3,500 per month
- 50% Living Expenses = $1,750
- 30% Wants = $1,050
- 20% Savings & Retirement = $700
$5,000 per month
- 50% Living Expenses = $2,500
- 30% Wants = $1,500
- 20% Savings & Retirement = $1,000
$7,000 per month
- 50% Living Expenses = $3,500
- 30% Wants = $2,100
- 20% Savings & Retirement = $1,400
$10,000 per month
- 50% Living Expenses = $5,000
- 30% Wants = $3,000
- 20% Savings & Retirement = $2,000
What to remember: Living paycheck to paycheck without an emergency fund can lead to disastrous affects that could take years to recover from. The 50/30/20 rule is a simple approach that’s helpful for beginners or individuals who struggle to budget or keep their finances in check. It offers the freedom to enjoy the “wants” while putting savings aside for the future and a rainy-day fund. Based on your take home pay (after taxes and employment deductions) 50% should be used for necessities, 30% used for wants and 20% used for savings and retirement.