For example, if I have $ 2,000 a month to go, how can I pay for housing, food, insurance, health care, debt settlement, and fun without running out of money? That’s a lot a limited amount can cover, and this is a zero-sum game.
The answer is to set up a budget.
What is a budget? A budget is a plan for every dollar you have. It’s not magic, but it represents more financial freedom and a life with a lot less stress. How to set one up.
How to budget for money
Calculate your monthly income, choose a budgeting method, and monitor your progress.
Try the 50/30/20 rule as a simple budgeting framework.
Allow up to 50% of your income for needs.
Leave 30% of your income for needs.
Put 20% of your income on savings and debt payments.
Understand the budgeting process
Find out your after-tax income
If you get a regular paycheck you will likely get that amount, but if you have auto-deductions for a 401 (k), savings, and health and life insurance, add those back on for an accurate picture of your savings and expenses. If you have other types of income – maybe you make money doing part time jobs – subtract anything that reduces it, like taxes and business expenses.
Choose a budget plan
Track your progress
Automate your savings
Automate as much as possible so that the money you put up for a purpose arrives with minimal effort on your part. An accountability partner or online support group can help you so that you are held accountable for decisions that are beyond budget.
Check your budget as needed
Your income, expenses, and priorities will change over time. Adjust your budget accordingly, but always have one.
Before you make a budget
Track all of your spending at a glance to understand your trends and identify opportunities to save money.
Try a simple budget plan
We recommend the popular 50/30/20 budget. In it you spend around 50% of your after-tax money on bare essentials, no more than 30% on needs and at least 20% on savings and debt repayment.
We like the simplicity of this plan. In the long run, those who follow these guidelines have manageable debt, the occasional room to indulge, and savings to pay for irregular or unexpected expenses and retire in comfort.
Find out how this budgeting approach is affecting your money.
Saving and debt settlement
See your money in one place
NerdWallet adds up your expenses and shows you how much you are spending on things like food, bills, travel, and more. We’ll also show you how you can save a lot.
Allow up to 50% of your income for needs
Your needs – around 50% of your after-tax income – should include:
Minimum loan payments. Anything beyond the minimum falls into the saving and debt settlement category.
Childcare or any other expenses that you may need to get in order to be able to work.
If your absolute essentials hit the 50% mark, you may need to dive into the “will” part of your budget for a while. It’s not the end of the world, but you need to adjust your spending.
Leave 30% of your income for wishes
Separate wants from needs can be difficult. In general, however, needs to live and work are essential. Typical wishes include dinner, gifts, travel, and entertainment.
It is not always easy to choose. Is Gym Membership a Want or a Necessity? How about some organic food? Decisions vary from person to person.
If you are debt free as soon as possible, then you can wait with your desires until you have some savings or your debt is under control. But your budget shouldn’t be so tight that you can never buy something just for fun.
Everyone budget needs both leeway – maybe you forgot an expense or one was bigger than expected – and some money to spend as you wish.
Your budget is a tool to help you, not a straitjacket that keeps you from ever enjoying life. If there isn’t money to have fun, you will be less sticking to your budget – and a good budget is one that you will stick with.
Put 20% of your income into savings and debt payments
Use 20% of your after-tax income to save for the unexpected, save for the future, and pay off debts. Make sure you think about the bigger financial picture; That can mean taking two steps between saving and paying off debt in order to achieve your most pressing goals.
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