Your spending intention will increase your chances of budget success.
Gather Your Expenses
The first step in the process is to know what you are spending your money on.
You should first gather your bank statements or credit card statements if you pay by credit or debit card for most purchases. If you primarily pay in cash or checks, you will need to collect receipts and bills. Bills should include regular expenses and those paid annually, quarterly, or bi-monthly, such as tuition fees, taxes, and insurance, in addition to those payments that can vary, like grocery receipts.
Classify Your Expenses
When reviewing your habits and spending patterns, categorize your expenses into groups that fit your lifestyle. For example, a “Home” category can simply include rent, utilities, and insurance. Or you might combine restaurant expenses and groceries together in a “Food” category. If dining out is an occasional treat, you may consider putting those expenses into an “Entertainment” group.
Expenses can be classified as fixed or variable. Fixed expenses do not change much – for example, rent or monthly insurance bills – while variable expenses change from week to month. For instance, going grocery shopping monthly or buying clothes are considered variable expenses.
When reviewing your spending, be sure to carefully consider both fixed and variable expenses. Variable expenses may change more frequently and can have a significant impact on your budget. Within this category of expenses, you will typically be able to identify more areas for cuts or savings.
Evaluate Your Expenses
Evaluate your expenses using three simple categories: needs, wants, and savings. Tori Dunlap, founder of Her First $100K and an internationally recognized financial expert and speaker, assigns motivational names to these categories, as detailed in an email to The Balance.
Needs: All adult expenses you cannot escape. “This money is allocated towards the expenses in your life that you need to eat, live, breathe, and all things for survival,” Dunlap said. According to Dunlap, this includes monthly rent or mortgage payments, groceries, utilities, insurance payments, loans, and credit card payments.
Wants: Fun spending. These often include expenses like Netflix subscriptions and dining out at restaurants. “Spending doesn’t mean deprivation,” Dunlap said. “There are certain things in life that bring us true joy and happiness. For example, I really enjoy spending money on food, travel, and experiences. By prioritizing my financial contributions to the other two categories, I can spend stress-free in all three categories that I value.”
Savings: Big life goals. “I take my big financial life goals seriously,” Dunlap said. Goals may include saving three to six months of living expenses in an emergency fund, paying off debt, or investing for retirement.
Dunlap suggested contributing to these goals by setting up automatic transfers from your checking account to high-yield savings accounts or goal-oriented retirement accounts.
Creating a Spending Plan
To create a budget for your net income in the upcoming month, you have several options.
Some people prefer to prioritize spending using the 50/30/20 rule, popularized by U.S. Senator Elizabeth Warren when she wrote her book “All Your Worth” with her daughter Amelia Warren Tyagi. Essentially, 50% of your income should go to needs, 30% to wants, and 20% to savings.
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Also consider zero-based budgeting, where you assign a “function” or category of expenses for every dollar that comes in, based on your priorities. Jario Grawal uses this strategy, with the help of the free expense tracker Mint, to determine amounts and monitor his spending throughout the month.
With this method, Jario Grawal has automatic payments and deductions set up for retirement accounts, credit cards, home and car expenses, and travel savings accounts, along with three months’ worth of fixed expenses in an emergency fund.
Other budgeting methods include the 80/20 budget, where you put 20% into savings and spend the remaining 80%. With the circumstance-based budget, weekly or monthly spending is determined by a system of cash or digital funds – when the money runs out, it runs out. This may help you slow down and check your accounts before spending.
Conclusion
Whichever method you choose, remember that there is no one-size-fits-all approach to budgeting. What works for you may not be the best way for your mother, for example.
It’s important to stay connected to your spending plan and track your progress. If the approach you are following isn’t working for you after achieving one financial goal, for example, try other methods. As you achieve new goals, your spending plan is likely to change and adapt as well.
FAQs
What constitutes a spending plan?
A spending plan should include all your income and expenses. It should detail all the money you receive and spend, as well as what you put into savings. In addition to fixed monthly payments, the spending plan should include variable payments and the financial goals you hope to achieve, such as a family vacation in Europe.
What is the 50/30/20 budgeting rule?
The 50/30/20 budgeting rule is a budgeting method that allocates your spending for needs, wants, and saving for your financial goals. It states that you should allocate 50% of your income for needs, 30% for wants, and 20% for savings. It is popularized by Senator Elizabeth Warren.
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Source: https://www.thebalancemoney.com/create-a-spending-plan-5094502
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