Creating a personal budget can be hard work, but it’s certainly worth it. Getting your finances in check may require some pain and anger in the beginning, but it will bring you joy when you know how much you can afford to spend, how much you are currently spending, and how much you can save for something to treat yourself.
There is plenty of pain, anger, and joy of creating a personal budget. Let’s look at some tips and tricks to make this process easier, so you can spend less time worrying about your finances and more time enjoying life.
Define the Difference Between Wants and Needs
The first step in creating your budget is figuring out what you need to spend money on, and what you want to spend money on. Needs likely include your rent or mortgage, your car finances such as a monthly payment, insurance, and registration, grocery bills (note: this only includes necessary groceries, not eating out with friends!), and other debt obligations such as student loans or credit card payments.
Then, your needs include entertainment costs, such as going out to dinner or for drinks, buying new clothes, traveling, gym memberships, and specialty coffees. Just because these expenses are wants doesn’t mean you can’t buy them, though. You need to build out your budget accordingly. All of your needs should come out of your paycheck first, and whatever is left over is yours to use how you wish, whether you want to spend, save, or invest.
The 50/30/20 Rule
Most financial experts recommend having a 50/30/20 rule. This means that you spend 50% of your post-tax income on needs, such as those listed above, 30% on wants, and 20% on savings and paying off any debt you may have. This calculation will help you avoid the frustration of not being able to cover your needs every month or figuring out what you can and can’t afford.
For example, if you make $4000 a month, your “needs” expenses shouldn’t total more than $2,000. That leaves you with $1,200 to use on fun stuff and $800 for savings.
Keep Track of Your Expenses
It’s easy to swipe your card or pull out some cash without keeping track of where that money is going, but keeping a close eye on your spending habits will help you build out a personal budget without the pain and anger. You could do something as simple as making a note in your phone about everything you spend money on, or you could use an automated app like Mint or Albert to help you keep track. These apps are nice because not only do they give you insight into where you’re spending money and how much, but they also make it easy to identify patterns and create a bucketed budget.
If you can’t meet the rules above, don’t worry! There are still plenty of ways to build out your budget. Some expenses that you categorized as needs might actually be wants, for example. Or, you may be able to spend less on your needs by moving to a cheaper place, buying a more affordable car, or calling your service providers, such as insurance or phone companies, and seeing if there are any lower rates or discounts you could be taking advantage of.
Lastly, you could cut out some of the wants in your budget. No one wants to live a life without any happiness or small treats here and there, but you would be surprised how much small expenses add up. If you just cut out the lattes from your favorite coffee shop or one of your monthly Target runs, you may be able to save quite a bit of money. You don’t have to sacrifice everything in your life, but making small changes can add up to a big difference.