Living beyond your means?
No judgment here. Because I have been there. (cry cry)
I have a good news for you.
Budgeting can get you back on track with your financial goals as it has helped me.
It is definitely not easy, and that’s why there are so many people in debt out there. (cry cry again)
Still, give it a try.
So that you can at least have a realistic look at how much you are supposed to spend each month.
Now, how do you create a budget that works and doesn’t stress you every time you have to do it?
You can use a simple strategy known as the 50/30/20 budget rule.
To be honest, the 50/30/20 rule can be applied to many personal finance aspects, such as investment, but let’s talk about that next time!
What is the 50/30/20 Budget Rule?
While it’s unclear where this rule originated, it became popular after Senator Elizabeth Warren talked about it in her book, All Your Worth: The Ultimate Lifetime Money Plan.
It’s intended to help anyone looking to achieve their financial goals, whether that’s saving for retirement, having an emergency fund, clearing debt, etc.
So, how exactly does it work?
You split your income, after taxes, into three spending percentages, that is, needs, wants, and savings/ financial goals.
50% of Income — Needs
Needs are your necessities or essentials, that is, the things you can’t live without.
In this case, you should include utility bills, minimum debt repayment, mortgage/ rent, car repayment/ transport, food, and health insurance.
I do want to ask you to be critical of your definition of “needs”.
Should rental payments be really considered an essential when the parents welcome you to live with them?
Or, is eating organic food really a “need” for you?
While the answer may vary from person to person (and I will surely say it’s essential for me to move out and enjoy my creative space), the key is to have the awareness of which expenses can actually be reduced and eliminated.
30% of Income—Wants
Once you have taken care of the essentials, you can now think about stuff you desire, but aren’t a must.
Think of stuff like that vacation you want to take, a new iPhone, a streaming subscription, and so on.
For me, my wants are usually experiences — like nice meals and drinks, or even online courses.
Yes, while I think continuing education and self-development are crucial in this era, I categorize these resources as my wants.
In fact, I would suggest allocating part of this 30%, say 20%, to personal development.
Because let me remind you this, by investing in yourself, you increase your income-earning potential.
On the other hand, if your desire for all the nice things and experiences already fill up that 30%, you can always learn from free resources online! (Hihi if you haven’t subscribed to this page and my YouTube channel yet☝️)
20% of Income — Savings / Financial Goals
This final category is the most crucial one and will steer you to your goals if you’re consistent.
Allocate the rest of your income, which is 20%, to your financial goals.
Depending on your goals and your current financial status, that can be saving, investing, and debt repayment beyond the minimum repayment.
For example, you can divide it into four parts to cater for your (1) emergency fund, (2) debt repayment, (3) retirement savings account, and (4) investing.
Now that you have an idea of how to use the 50/30/20 rule, here are a couple of tips to help you start following the rule and eliminate budgeting stress:
1. Know How Much Your Income is
Figuring out your income can be easy if you have only one source.
But if you have multiple sources of income, that is a main job/ business and a side hustle(s), you might need to sit down and do the math.
Remember, you want to know your net income, which is what you remain with after taxes.
2. Figure Out Your Limit for Each Category
Now using the 50%, 30%, and 20% rule, calculate how much you can spend in each category and also reflect on how you can adjust your current consumption habits.
Remember, your budget is not permanent, and if you feel that such a budget is too tight (which is often how I feel no joke.), motivate yourself to increase your income or better yet, generate more streams of income!
Btw, credit cards can easily derail you from your financial goals.
Therefore, I recommend using debit cards, which can be in the form of a visa and master card, instead.
3. Track Progress and Adjust Where Needed
There’s no way to know if your budget works unless you track it.
When you are just starting out, try to review weekly your plan alongside your monthly expenses and see where you need to improve or adjust.
4. Stay Consistent to See Results
Now the most important tip of all is to stick it out.
Remember, it might not work as well the first few times, and that’s fine.
The goal is to improve your spending habits until you’re in line with the rule.
The Mindset need to make a budget work
I want to let you know that even though I have a budget, I often find myself failing to meet it, because as a business owner, unexpected expenses do come.
However, the goal here is not to be perfect, but to take ownership of your finances and your financial habits, even if they are the bad ones.
Having a budget will help you face those poor financial choices you made, and if you are a responsible adult who chooses growth, you will be motivated to make positive changes.
Rather than focusing on perfection, use it as a motivation for taking action!
Btw, budgeting is definitely a way to help you get out of debt.
On that, don’t forget to check out my article/video — Should you invest or pay off debt?
For questions, tips, or anything you’d like to add to the topic, drop a comment below.
Btw, I am launching my own NFT collection called Rich Goddess, which you may want to check out. 😉