First up: the 50/20/30 method.
Heres how the broad strokes break down:
50% of your monthly spending goes toward essentials.
Your home, your transportation, your food, etc.
20% of your monthly spending goes toward savings goals.
30% of your monthly spending goes toward everything else.
That might include your gym membership, travel, gifts, and dining.
Ill use the same salary and expenses each time I present a budgeting example this month.
This hypothetical person makes $50,000 per year before federal taxes and does not pay state income tax.
They do not make any pre-tax contributions to a 401(k) or other benefit account.
Their healthcare premiums are covered by their employer.
(Like I said, this is hypothetical.
Were going for simple math here.)
A quick glance will tell you this budget is all off.
You might notice the percentages dont add up because were over budget.
Time to rearrange some things.
Its not sexy, and its confusing, but stick with me.
The 20% savings category is often referred to as financial goals.
Focus on debt payments, and the benefit cascades down to other areas of your budget.
Now were on better footing, but the three parts of the budget are still a little off.
But maybe you’ve got the option to reduce your essentials to balance things a bit better.
You call your internet company to get a discount on your service.
You clip coupons and use rebate apps to spend $25 less on groceries each month.
Theres $80 bucks.
How much of a difference does it make?
Hey, thats not bad.
The three groups dont add up to 100% because were coming in under budget.
This person has $141 left over each month that could go toward whatever they want.
Maybe even a night out!
It takes some trial and error to determine the best breakdown for you.
And rememberI will tell you over and overa budget is a living document.
You will need to make adjustments along the way as circumstances change or unexpected costs arise.
So dont have a go at set it and forget it.
