Businesses are great at stretching what they have. Sure, they could use a company credit card or take a loan, but for the most part, they use what they have, and they are smart about it – why should people be any different?
Businesses know it isn’t about what you have, but how you use it – and it is a lesson everyone should learn.
Everyone has financial goals. Some people want to have more spending money, others want to have more of a cushion in the checking account, while some just want to be able to afford to eat out with their co-workers at lunchtime. It all comes down to a desire for more money, at least on the surface.
In reality, most people do not spend money very well.
They spend too much on the wrong things and cut out things that really matter. Budgets help keep you on track but they also help you spend what you have strategically.
START WITH WHAT YOU EARN
Design a budget that works for you by starting with how much you make. Take a look at your net pay (that means after taxes and deductions, it is how much cash your check is worth).
Now, think about any other sources of income you may have. Do you have a second job? Do you sell coffee cuffs on Etsy? Do you sell your old clothes on eBay or the local consignment shop? If you predictably receive more than $50 a month from something other than your primary job, write it down.
Next, write down your obligations. We all have them. Bills that have to be paid every month or you wreck your credit, have to pay late fees, or otherwise have to deal with penalties no one likes to think about. Items in this category include your rent, your electric, your car loan, your student loan, and your credit card minimum payments.
That said, keep in mind that you should record the minimum payment required. Any amount you pay over that is optional.
The amount left over after you subtract your obligations from your earnings is money for spending and saving. A good rule of thumb is the 50-30-20 rule. Basically, half of your leftover money should go towards necessities, like groceries. So, if you take home $3,000 a month and you have $500 left after you pay your rent, car payment, and student loan, roughly $250 of that should be budgeted toward groceries.
Lifestyle choices come next. These are things like drinks with the girls or getting takeout, but it also includes expenses you might be tempted to think of as obligations, like your gym membership or a magazine subscription. Lifestyle choices are anything that is optional. These expenses should account for no more than 30% of your leftover money, or roughly $150 using this example.
The remaining 20% of your leftover money should go toward your financial goals. This is your savings, the extra you pay on your credit cards, the amount you save for retirement, and the amount you save for a down payment. In this example, you would have an extra $100 a month to use against debt or save.
HOW TO SPEND IT
These are just general guidelines. If you have a lot of leftover money, you may find that you can afford to save more toward your financial goals, but it is best to try and stick with max on lifestyle choices. It may sound constricting but the true art of budgeting is not really how you divide the pie, but how you prioritize within the slice.
Let me explain.
Budgeting can feel a lot like dieting, but it doesn’t have to. It is all about choices and priorities. If you only have $150 extra per month to spend but you truly love your morning Starbucks trip, you don’t have to cut it out – just make smarter choices. Is it your favorite latte you really love or is the act of going to Starbucks. If it is the latte, limit your visits for only three days a week or order a smaller size; if it is the tradition, buy a less expensive drink, like a drip coffee or hot tea.
Likewise, think about your groceries. Just because you are on a budget doesn’t mean you have to buy foods you don’t like. Wouldn’t you rather enjoy your Haagen Daas and have ramen noodles for dinner one night than stick to buying the middle of the road, cheap ice cream and middle of the road, cheap dinners? Buy your favorites and scrimp on the rest. You will be able to stick to your budget better if you allow yourself certain favorites – and you’ll be happier.
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