Developing a ‘Workable’ Spending Plan
Having a spending plan (a.k.a. budget) is essential if you want to become an MW or achieve financial freedom. Without one, it’s just too easy to get sidetracked, to fall into the trap of using fuzzy math. That is, thinking that you have more money than you actually have because you forgot about some purchases, or making the mistake of confusing your gross salary for your net salary. (Ouch!) It’s no secret that budgets have gotten a bad rap, but they are a valuable tool for anyone who wants more control over their money.
Overall, budgets create financial stability. They help . . .
- provide funds for everyday expenses and to fund goals.
- ensure that you don’t spend money you don’t have—planning your spending ahead of time allows you to stay within your boundaries.
- identify unnecessary expenses and refocus on what’s really important to you.
- you prepare for emergencies—adding a fund for the unexpected, such as car repairs, a serious illness, being laid off, or a death in the family; or an F-you fund so you have the freedom to leave a toxic job or bad relationship .
Yes, having a budget will require some work, but once you go through the initial setup, the time to maintain it can be minimal. You can create a formal budget where you basically track every penny, but I have found that having overall guidelines can be just as helpful, like the 50/20/30 formula. I like it because it’s quick and easy to setup and provides guardrails so you where you stand at all times.
The 50/20/30 Formula
The 50/20/30 formula is a guideline for allocating the funds in your budget. It represents the percentages of your take-home pay into three main categories: essential expenses, future expenses for financial goals, and lifestyle expenses. In this case, 50 percent of your income is allocated to essential expenses like rent/mortgage, groceries, utilities, and transportation. 20 percent is allocated to future expenses like paying off debt, building an emergency fund, and saving for specific goals or retirement. And 30 percent is yours to play with! To spend any way you like.
To determine how much of your income to allocated to each category, you’ll need to know your after-tax income (the amount that is actually deposited in your bank account). It’ll be the basis for all of your calculations.
For example, if your monthly take-home pay is $4,000, applying the 50/20/30 formula would give you a budget of:
50% for essentials = $2,000 (0.50 X 4,000 = $2,000)
20% for future = $800 (0.20 X 4,000 = $800)
30% for lifestyle = $1,200 (0.30 X 4,000 = $1,200
Note: The 50/20/30 formula is a guide that works in most cases, but we know that money isn’t a one size fits all situation. So, before you dive in, recognize that your personal budget may need some tweaking or wiggle room at times.
For example, if you’re playing catch-up with your retirement savings, your 20 percent may need to expand to 30 percent or more so you will have the funds you need for retirement. Or if housing is very expensive in your area, you may need more than 50 percent to cover your current essentials. The goal here is for you to understand what goes into each of these categories—your essentials, your future, and your lifestyle—and to understand what a workable budget might look like in your case.
Want more info about setting up a spending plan? Schedule a complimentary call and let’s talk about where you are and steps you can take to create a plan that fits you.