While it would be nice for you to know down to the penny where all of your money is going, you may find the idea of sitting down to calculate all of these expenses daunting and choose to avoid the experience all together. This is especially true if you are new to reining in your spending and want an easy entry point.
Here is a simple way to help you think about budgeting to help you make better financial decisions every month.
STEP 1: Find out how much money you make: Sometimes you have a ballpark figure of how much we make monthly, but it is important for you to ensure that you understand what your take-home pay is after taxes, after retirement allocations, child support payment, alimony, etc.
STEP 2: Break down your monthly financial decisions into three categories: Sort your monthly expenses into three categories: needs, wants, and savings. When you do it this way, the visual alone will show you where the majority of your money is going. To maximize this system, you have to be honest and clear about the definition of “need” vs.“want.” An example of a need is food. On the other hand, an example of a “want” is eating out every week.
STEP 2 ½: Estimate what percent of your expenses is going toward needs, wants, and savings. After you lay out your expenses and savings, figure out how much each category is in relation to your take-home pay. For example, if your take-home pay is $3,000 monthly and the cost of your apartment and other needs is $1,300, your “wants” add up to 1,600, and your savings amounts to $100, then your needs, wants, savings percentage is : 53:43:3 respectively.
STEP 3: Identify two low-cost “wants” that can be easily translated into monthly savings. If you noticed that you spend $60 monthly on your nails and $100 on clothes, those are two areas that can easily be trimmed with discipline and awareness. Commit to saving at least 50% ($80) of this amount for savings this month and work your way to saving 100% of this money next month. Set up automatic withdrawals for this to work. Repeat this process until all unnecessary wants are either trimmed or completely translated into savings.
STEP 4: Identify one “need” that could be reduced and easily translated into monthly savings. Are you renting a really expensive apartment that you can’t really afford? Are you shopping strategically for food? Since cell phones are almost a necessity in the 21st century, how can you reduce your data plan, switch over to prepaid, or a less expensive service provider?
STEP 5: Continue to use this system until the ratio of needs, wants, and savings is 50:30:20. Working toward financial freedom is a process, so don’t beat yourself up as you work towards your financial goals. As I have mentioned in previous articles, the 50:30:20 rule as an ideal goal for a healthy budget. Fifty percent of your monthly income goes towards your needs, thirty percent goes towards your wants, and twenty percent goes towards your savings and investments.
Frugalistas– where can you trim the fat? what are your stats?