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One of the most crucial elements of personal finance is budgeting, yet it isn’t universally taught in society. Many times, in speaking with our clients, some of the first questions that come up are budgeting habits and how they can improve them.
We like to guide our clients to build a framework which is conducive to their spending habits and needs. Since everyone’s situation is different, there are a multitude of ways that you can go about building strong budgeting habits.
Below we have listed some of the most common yet impactful practices that you can employ to hopefully keep you on a consistent budgeting path.
Creating a Budget:
First, let’s talk about creating a budget. Here, we want to start out with the basics and understand what our monthly income vs monthly expenses are. From the monthly income perspective, this is relatively straight forward by just looking at your salary or other forms of income generated each month.
For expenses, we like to implore our clients to look at the last 3 months of their bank statements and bifurcate their essential spending from their discretionary spending. This will help us to understand how much they “must” spend each month and how much they “choose” to spend each month.
From here we can create a basis for how we can develop a plan to help them understand how much they should spend each month to be more aligned with their goals.
Along with answering the questions, what is my monthly income and what are my monthly expenses, we can go even further by answering a few more.
- How much debt do I have?
- This includes both long and short term debt. Long term debt such as your mortgage, car payment, etc. and short term debt such as credit cards all need to considered when creating a budget.
- How much am I saving?
- Just as the question above, the includes long and short-term savings, which we will talk about a bit more next.
Now, let’s talk about the strategies. One of the most common budgeting habits is the 50-30-20 rule which we will dive into a bit deeper below:
50/30/20 Rule:
The 50-30-20 rule can be a very effective budgeting tool. For those who have never heard of it, the 50-30-20 rule is designed to set aside portions of your monthly income to different areas of your spending.
The rule suggests that first, you should allocate 50% of your monthly income to your needs in life. This includes things like healthcare, mortgage, utilities, groceries, etc.
Next is 30%. The rule suggests that you should allocate 30% of your income to your wants in life. This is another way to say your discretionary spending, for things such as shopping, going out to dinner, buying fancy clothes, etc.
Finally, is the 20%. Here, the rule states, you should allocate 20% of your income to your savings. This could be for both long and short-term savings for things such as a remodeling of a room in your house or towards your saving for retirement.
Of course, this is just a guide that you can set up for yourself to help create a better budgeting habit. By doing this, it can help you understand if there are areas that you may be spending too much in or if you aren’t putting enough savings away for emergencies or other long-term goals.
Pay Yourself First
Another popular budgeting habit is called the “Pay Yourself First” method. Just as it sounds, for this strategy you will pay yourself before you allocate any of your income towards other expenses. This “payment” generally can be a pre-determined percent or dollar amount that goes into your savings each pay period.
From there, your next allocation is towards your essential spending for the month. As stated above, this includes all things in life that are necessary for you to live.
Finally, from there, the leftover money that you have can go towards your discretionary spending so that you can also continue to enjoy things in life.
The final word:
Depending on your situation, there may be different methods that can help you create a budgeting habit. These frameworks are not a one-size fits all, but they do help to build a plan that, with consistent practice, can help bring confidence to your personal finances.
Thanks for reading! Do you have questions you would like us to discuss here? Click this link to let us know and we hope you found this helpful!
https://www.rocklinewealth.com/request-a-meeting
If you would like to check out a video we produced on this topic, feel free to click here: Budgeting Concepts I Use to Plan for Retirement
Disclaimer:
Rockline Wealth Management (RWM) is a registered investment adviser located in Plainview, NY. RWM is registered with the U.S. Securities and Exchange Commission. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.