The first thing you need to do before you create a spending plan or budget is to know where you stand right now. In the last post, we discussed getting everything together so that you know where you stand. Now we’re going to talk about setting up a spending plan or creating a budget.
Spending plans are useful because they focus on what you have left after meeting your basic needs to improve your life or reach a goal that you’ve set. Budgets are great for people who have moved past living month to month and can now enjoy playing with their money more. But also, it’s just a different mindset, so whether you use a spending plan or a budget doesn’t matter. Choose one or the other.
Setting Up Your Spending Plan
Spending plans are super simple to set up. What you need to know is how much you have coming in, minus your must-have living expenses such as shelter, food, health care, clothing, and business or work needs.
For example, if you work online from home, your automobile may really be a want and not a need. But if you have to have the car to get to work, or you have to use it for health care, or there is no other way to get food where you live, the car becomes a need.
Once you know what you have left after meeting basic needs, you can now use the money you have to help you set up savings, pay off credit card debt, start a new business, or meet other life goals you have, such as learning to ballroom dance.
Setting Up Your Budget
To set up a budget, the one recommended by most financial counselors is the 50/20/30 rule or plan. You start the same, list all your income and your expenses, including your wants, needs, and responsibilities, all in one big spreadsheet separated by their categories: Needs, Savings, and Wants.
You can find 50/20/30 rule calculators online to play with too. This one at Nerd Wallet is a good one, but you can set up a spreadsheet to work for you too.
The basics of this plan are that half your after-tax money is for necessities, 20 percent is for savings and paying down debt, while the rest, a full 30 percent is for wants. Wants can be defined as expensive clothing, designer makeup, and a fancy car over the basics, as well as playing the stock market. Needs include housing, food, transportation, basic utilities, insurance, childcare, and minimum loan payments. Savings includes investing money in a savings account, stocks, bonds, growing your emergency fund, or paying down debt.
Click here for part 3 Reimagine Your Budget: Reorganize, Reduce, and Eliminate
