If you want to take charge of your money and spending, budgeting is essential.
This is where a monthly budget can assist with organizing and tracking your spending. If you’re asking what should my monthly budget be, it will depend on several factors, including your income.
It is all too simple to splurge in the era of contactless payments and internet shopping, leaving you short on cash as you wait for your next paycheck.
However, you can start to improve your money management and start saving for the future by evaluating your costs, prioritizing your financial obligations, and making a budget based on this information.
If you want to concentrate on paying off debt or increasing your savings, read on to learn how to develop and manage a budget that fits your situation.
What Is A Budget?
A budget is essentially a plan that details how you will spend each and every dollar of your money.
You decide how much you can afford to spend in each category, which should encourage you to develop responsible spending habits.
A budget is designed to help you in the long run; if you only follow it for a month or so, it won’t make much of a difference.
While sticking to a budget is not always simple, you should attempt to keep focused on your goals.
A sound budget can provide you greater financial freedom and make you feel more at ease handling your money if it is followed consistently.
The 50-30-20 Rule
The 50-30-20 rule is a simple budgeting technique that can assist you in managing your money in an efficient, straightforward, and sustainable manner.
The general rule of thumb is to allocate 50% of your monthly after-tax income for needs, 30% for wants, and 20% for savings or debt repayment.
You can make better use of your money by consistently maintaining a balance between three key areas of expenditure.
You can also save yourself the time and frustration of going into the specifics every time you spend by keeping track of only the three main categories.
A fantastic way to give your spending habits more structure is to use the 50-30-20 budget template.
Whether you’re trying to pay off debt or save money for a rainy day, it might make it simpler for you to achieve your financial objectives.
50% Towards Your Needs
Needs are expenses that are unavoidable. They serve as payment for all the necessities without which it would be difficult to survive.
Your most essential expenses should be covered by 50% of your after-tax income. These needs may include:
- Gas and electricity bills
- Loan payments
With this logic, if your monthly after-tax income is $2500, then you should allocate $1250 of your budget to your essential needs. This proposed budget may vary from person to person.
If you find that your needs total more than half of your gross income, you might be able to make some adjustments to reduce those costs.
This could be as simple as switching to a different energy supplier or discovering new strategies for saving money on your grocery shopping.
It might also call for more significant life adjustments, like looking for a less expensive place to live.
30% Towards Your Wants
Your most basic needs can be met with 50% of your after-tax income, leaving 30% of your budget for your wants.
Wants are items that you choose to spend your money on even if you could live without them if you had to. They are characterized as non-essential expenses. These could include:
- Dining out
- Gym memberships
- Non-essential groceries
- Entertainment subscriptions, such as Netflix
Using the same example above, if your monthly income after tax is $2500, you can spend $750 on your wants out of your budget.
If you believe that you’re currently spending too much on your wants, then it’s worth considering what you can cut back on to make this rule work.
20% Towards Your Savings
The remaining 20% can be used to pursue your savings goals or pay off any outstanding debts after allocating 30% of your monthly income to wants and 50% to needs.
Even though the minimum payments are regarded as necessities, any more payments are regarded as savings because they lower your current debt and accrued interest.
You can create a better, more enduring savings plan by consistently setting aside 20% of your monthly income.
It doesn’t matter if your ultimate objective is setting up an emergency fund, creating a long-term personal financial plan, or saving for a down payment on a home; this plan will work.
And it’s amazing how quickly savings can grow! If your monthly take-home pay is $2500 after taxes, you should set aside $500 for savings.
You’ll have saved about $6000 in just one year.
Applying The 50-30-20 Rule To Your Budget
So how do you apply the 50-30-20 rule to your monthly budget?
You must determine the 50-30-20 ratio depending on your income and categorize your expenditures in order to put this straightforward budgeting concept into practice.
This is how you do it:
Calculate Your Income After Tax
The 50/30/20 budgeting rule requires you to first determine your after-tax income.
Your monthly income as a freelancer, minus your business expenses and the amount you’ve set up for taxes, will be your after-tax income.
This will be simpler if you have a consistent job and a paycheck. See how much money is deposited into your bank account each month by looking at your payslip.
If payments for pension funds or health insurance are automatically taken out of your salary, add them back in.
Categorize Your Spending
You must examine how and where you spent your income during the previous month in order to get a complete picture of where your money is going.
Take a look at your 30-day bank statement and just group each expense into its own category, such as bills, entertainment, and groceries.
This can be done manually or with the aid of a budgeting tool. Divide all of your spending into the following three groups: needs, wants, and savings.
Keep in mind that a need is a cost you absolutely must have, like rent. A want is an extra luxury that you could do without, like going out to eat.
Additional debt repayments, pension fund contributions, and plain old savings are all examples of savings.
Evaluate And Adjust To The 50-30-20 Rule
You can begin to adjust your budget to conform to the 50-30-20 rule once you have an understanding of how much of your income is allocated each month to needs, wants, and savings.
The easiest method to do this is to evaluate how much money you spend each month on wants.
The 50/30/20 guideline states that a want is not extravagant; rather, it is a basic convenience that enables you to enjoy life.
It’s essential to figure out which of your wants you can cut down on in order to keep within 30% of your take-home pay because cutting back on your necessities can be a difficult effort.
Your chances of reaching your 20% savings goal increase as you cut back on your wants-related spending.
The Bottom Line
Now that you know about the 50-30-20 rule and how to apply it, you can start living comfortably while adhering to your monthly budget.
This rule makes saving easy and living within your means a piece of cake! Give it a try today and see how well it works for you.