January is all but in the books … are your new year’s resolutions still intact? If “maximizing your personal finances” is a top priority this year, a personal budget is key.
Creating and following a budget is the best way to maximize your “money life.” Budgets guide you and keep you in the loop, knowing where your money is coming and where it is going. Building a budget you love means having a budget you can follow. To get started, consider following the 50-30-20 Rule:
50% = Needs These are the things you can’t do without … groceries, housing, utilities, health insurance, and transportation. These expenses should total no more than 50% of your income. While these amounts are typically consistent, it is important to review them regularly.
30% = Wants At first, you might be thinking “Hello beautiful shoes!” … but wants are not necessarily extravagances. The basic niceties of life are wants, such as cable television, your cell plan, your lawn service, and new shoes. Consider your wants as “flex costs.” If these flex costs are higher than 30%, ask yourself which of them can be cut or reduced. Yes, this can be tough!
20% = Savings (and Debt Repayment) Saving money each month is key to maximizing your financial life. Savings help you cover unexpected expenses as well as achieve your long-term financial goals. Saving 20% of your income and/or devoting to debt reduction will bring balance and peace of mind to your financial life.
So what happens if you take a hard look at where and when you spend your money and your 50% is really 60%? And, your 30% is 40%? And, your 20% is zero?
Begin with making small changes that will stick. If your housing costs are high, maybe consider getting a roommate. If you eat out more than you eat in or need to be among the first with the latest and greatest tech gadgets, recognizing these habits is the first step. Once you have identified where your money is going, choose one or two changes to help you gain more control. Maybe pare back your cable plan or limit the number of times you eat out a week. Don’t try to knock down all of your spending at once. Start small and see steady success. Finally, make room for fun stuff. A budget is not a set of handcuffs. A budget is the key to knowing and controlling where your money is coming and going. Much like a diet, if you cut out all the foods you love, it’s tough to follow, so be certain your budget includes some fun.
