If you want to take control of your money this year, the first skill you are going to have to master is the art of budgeting. Budgeting essentially is the skill of dividing your expenses up into categories, deciding how much you will spend in each and then make sure you don’t go over your limit. It is a simple concept but one which many young adults struggle with at first.
If you want to budget successfully you will want to follow a rule which is called the 50/20/30 rule. The idea of this is that for all of the money you have in the home each month: you should be spending 50% on essential payments, 20% on priorities and 30% on your lifestyle. It is a simple concept and one which will turn you into a budgeting boss if you learn it correctly. Once you have mastered this simple concept you can manage your money with ease.
- Essential Spending
The first type of expense you need to understand is your essential expenses. This means that you need to take a closer look at your spending throughout the month and pinpoint the vital spendings you take. This doesn’t mean Val’s Cleaning Maids, that coffee you have every morning or your online shopping. Essential spending is the bills you pay in your home, your mortgage, your car insurance and your taxes. These are the costs you have to pay out every month no matter what.
The 20% which you spend on financial priorities means that you are paying for things that will be of use in the future. This sort of thing will include any payments you make for your retirement, any life insurance you pay off and any debt payments you are currently paying. These are all things which are important, but should not take up too much of your monthly income.
The most simple of the three types of spending; this included anything you spend which is not necessarily essential. This will be your payment for the gym, your mobile phone, WiFi, food at restaurants, days out, new clothes and lots more. This should take up around 30% if your monthly spend and will be what allows you to live the type of life you want. Out of this 30% you will also ideally want to save a little money and put it aside for emergencies.
The key to being able to budget successfully is to be able to balance all of these different types of spending. If you ever notice that the percentage of one of these is rising too high, you need to work to reduce it. For example if your bills and essential income becomes too high you may need to start looking into different energy companies or even a way to remortgage your home. This will free up money which you need for other parts of your life. Once you have mastered this you will be able to stay afloat with your finances with no effort.