50/30/20 Budgeting: Part 2
This post is a more in-depth explanation of the 50/30/20 rule generally discussed in 50/30/20 Budgeting: Part 1. If you haven't read Part 1 I recommend reading that first then returning here.
When setting up your budget you should first find your after-tax income amount from one months' worth of paychecks. Make note of this number. From there, multiply the after-tax number by 50 percent, 30 percent, and 20 percent. For instance, if your after-tax amount was $2,000, you should end up with $1,000, $600, and $400. This is the ideal spending allocation for someone who has $2,000 of after tax monthly income.
Next, comes the "hard" part. Now that you have found your target spending, compile a list of ALL of your monthly expenses and their approximate value. Yes, every single one (this is where a banking app could come in handy). Some examples of monthly expenses that you may have are: utilities, medical, insurance, cell phone, groceries, gas, mortgage/rent, car/student loans, faith/other donations. Make adjustments to your expenses so it accurately reflects your spending habits. Specifically, if you took a vacation last month, you wouldn't include that in your list since you don't take a vacation every month (if you do vacation every month please let me know how you do this. What is your secret? Message me the details).
Once you are done making your list, identify between your wants and needs. Insurance would be considered a necessity while housekeeping could be considered a want. Food could go either way. Groceries are a necessity while dining out is a want. Your needs should hopefully equal 50 percent of your monthly income while your wants total around 30 percent. If not, and you are still motivated to improve your spending habits, it may be time to reevaluate your wants and make some changes.
This is a fairly simple process and if you take a couple hours out of one day to document your finances, then you are well on your way to reducing stress, while still having fun.