Breaking down your budget

For many young people (and even older people), learning to budget is something that proves to be incredibly difficult. There are all sorts of tools out there that are designed to help ordinary people be able to gain some control in their financial situation, but it can begin to feel overwhelming and complicated. For this reason, finding a simple solution to budgeting is often what works best for most people. Finding a simple solution makes it easier to calculate how you are doing for the month, and if you need to cut back on anything. To help you in this endeavor, here are some tips for how to break down your budget…

 

The common 50/20/30 rule

One of the most popular methods that is used to break down a personal monthly budget is called the 50/20/30 rule. Essentially, the way this rule works is that you break down your budget into three very broad categories, rather than focus so much on the little specifics. These categories are general living expenses, saving and debt, and lifestyle spending. We’ll get to what each of these covers a little more, later. As far as how they break down, no more than 50% of your budget should go towards general living expenses, at least 20% to saving and debt, and then that leaves you with roughly 30% of your budget to spend on your lifestyle. The great thing about this type of budget is that it can be flexible to a variety of situations, and helps a wide variety of people feel like they have a better grasp on their finances.

 

General living expenses

No more than 50% of your budget should be set aside for general living expenses. These general living expenses should be thought of as the essentials for you to continue living life and getting to your job. This will include your shelter, such as a mortgage or rent, as well as your transportation, whether you need to pay for a car or purchase a transit pass (or even maintain your bike). Another important aspect to keep in this category is your utility bills (heating, cooling, etc), as well as your grocery budget (don’t include eating out in this portion of the budget, that will come later). If this part of your budget is exceeding 50%, then it means that you need to reevaluate how you are currently living. For more information on how much you should generally be paying for housing, check out this informative article here.

 

Saving and debt

This portion of your budget is meant to keep your financial future on your mind. Putting aside at least 20% of your budget towards financial goals will keep you reasonably ahead of most financial situations. This part of your budget should include saving money for retirement, as well as any extra investments that you want to do to grow this part of your money. It should also be used to pay back any debt that isn’t included in your general living expenses (don’t include your mortgage or car payment). The great thing about this method is that the 20% you put towards saving and investing will continue to grow as you are putting more in, which means that the 20% you put in now will grow under compounded interest for later. You can put more towards this 20%, if you have other parts of your budget under control.

 

Don’t forget fun

You could set aside all of your budget towards your general living expenses and your financial future, but this will drive most people insane. What’s the point of living if you don’t ever feel like you are actually alive? This is why it’s usually a good idea to set around 30% of your budget towards spending for your lifestyle. If you go to the gym a lot and get an energy smoothie when you are done, then it calculate that into this part of your budget. If you like to get a lot of tattoos, then factor that in here. Do you eat out a lot? That goes here as well, rather than in your grocery budget. Having a specific amount of money set aside will mean that you never feel bad about spending cash on things that you don’t necessarily need, since it was meant to spend on that in the first place.