Budgeting is a skill that can help anyone make better decisions with their money. Preparing for unexpected expenses, saving up for big purchases, which all require one to spend less than they earn. Budgeting can feel restrictive and intimidating.
Proportional budgeting is a great starting point for anyone that is feeling overwhelmed. By dividing your income into categories by percentage, it is a simple concept to apply. A popular breakdown is the 50/30/20 budget, first introduced in a book written by Elizabeth Warren and Amelia Warren Tyagi.
The 50/30/20 budget suggests that you spend 50% of your income on needs, 30% on wants and 20% on savings. The first step is figuring out how much money those percentages represent for you. Take your monthly net income after taxes and deductions and multiply by 50%, 30%, and 20% to figure out your spending limits.
ie. If your net income is $3,000 a month, you would focus on spending $1,500 a month on needs, $900 a month on wants and $600 a month on savings.
To measure the success of this budgeting, you should track your spending for a minimum of two months. You can keep track of your transactions through various ways but the more accurate you are, the more effective the 50/30/20 budget will be.
Tips on tracking:
- Have your bank account and credit card statements handy to reference your purchase history
- Document cash transactions that don’t show on bank statements (paper file or note on your phone)
- Keep an eye out for annual bills (which could include subscriptions, membership fees, property tax) and divide by 12 to figure out what your monthly cost is.