If you have more month than money, the first step toward fixing your finances is creating a budget. Don't like the b-word? Then, don’t think of it as a budget—call it a “spending plan” instead.
“Plan” is the operative word. Once you have a framework in place, each of your hard-earned dollars will have a job to do, in terms of both everyday expenses and future goals.
The 50/30/20 plan
One of the simplest spending plans is the 50/30/20 budget, where you dedicate a certain portion of your income to particular expenses. Using this plan, here’s how you would allot your take-home pay for maximum value:
- 50 percent for must-haves. That’s rent, food, healthcare, utilities, insurance and minimum debt service. Obligations like student loans or child support would be paid in full, whereas sometimes only minimum payments on consumer debt are possible.
- 30 percent for “wants.” Things like meals out, vacations and entertainment fall into this category.
- 20 percent for savings and debt. This includes retirement, other investments, an emergency fund and any additional debt service.
That 50/30/20 plan isn’t set in stone. As long as you’re taking care of business, you can build some wiggle room into your budget. For example, if you're determined to pay off your auto loan as soon as possible, you can apply some of your “wants” dollars toward it. Or, perhaps you're attending a wedding in six months. In that case, start beefing up the “savings” section. You can redirect some of those “wants” bucks, or try tactics like researching the best deals on utilities, grocery shopping from a list and using public transit.
Know that you should prioritize retirement planning over debt repayment, especially if there’s an employer match. Even if you don’t get a match, remember that every dollar you don’t put toward retirement is a buck that can’t help you later on. Chew on this math for a minute: Given a 5 percent yearly interest rate, if you invest $100 when you're 20 years old, it will grow to $1100 by the time you hit 70.
Ideally, you’ll save at least 10 percent of your earnings for retirement. That might sound tough, but this is the best time to start. (Hint: Ask older co-workers if saving for retirement got any easier in their 40s.)
Tracking your money
Spreadsheets work, and so do pen and paper. In the digital age, however, people tend to want an app for that. Plenty of budgeting apps exist; some free, some not. Search for “best free budgeting apps” and compare the pros and cons. Otherwise you might wind up spending over $80 per year for basic budgeting services.
And if you want help from a human being, nonprofit organizations like the National Foundation for Credit Counseling and the Financial Counseling Association of America can talk you through the business of budgeting. Services are offered for free or on a pro-rated basis.
What are your goals?
Sure, you could budget on autopilot. But setting financial goals can help keep you aware of your progress and motivate you further. Shoot for goals that are:
- Specific: “I want to take charge of my money” is laudable, but vague. Have you thought about what you’ll do with your cash once you’re controlling it?
- Important: Competing in the Iron Man Triathlon is a fun goal. However, quitting your job at 27 to train for it means going into debt and also nixing the chance to add to retirement.
- Achievable: Paying off $50,000 worth of student loans in two years while buying a home and having your first child are all great things, but it’s unrealistic to think you could do them simultaneously. Don’t set yourself up for failure.
And if you’re not ready to plan your future just yet? Try this goal on for size: “I will succeed in the 50/30/20 budget, and then give myself room to dream about possibilities.”
Here’s the best news about budgeting: once you’ve got a plan in place, it becomes second nature. And having control of your cash provides great peace of mind because you’ll be taking care of business but still enjoying some of the fruits of your labor.
