As the economy is impacted by the COVID-19 crisis – and as your personal situation evolves – it’s a good reminder that our financial lives aren’t linear. That’s why developing a realistic budget is so important.
I know it’s stressful to take a hard look at the numbers, but you can reduce some of the anxiety by thinking about your budget as a living document that can be adjusted over time. One way to adjust your budget it trying out this 50-30-20 rule!
It calls for 50 percent of your income to go toward your needs, 30 percent to your wants, and 20 percent to your savings.
Step one: Figure out your monthly income. Calculate your income after tax (also known as your net income). This is how much you make annually, minus federal and state taxes. Also, go ahead and subtract any deductions that are withdrawn automatically from your paycheck like healthcare, life insurance, or retirement plan contributions.
Step two: Identify your needs. Fifty percent of your income should go to needs. This is mortgage/rent payments, car payments, utilities, debt, and groceries. Basically, the stuff you can’t get away with not spending money on. Say goodbye to at least half of your paycheck for the necessities.
Step three: Explore your wants. Thirty percent of your income can go to wants. This is the stuff you like spending money on, like your streaming subscription services, gym memberships,going to see movies, restaurants, and travel. This is the fun stuff, but try not to let it creep past the 30% mark, or it will begin to eat into your savings.
Step four: Start saving. Twenty percent of your income should go into savings. This is where you'll begin to grow your emergency fund, put money away for retirement or save up for debt repayment. The better you are at limiting your “fun” spending, the better your savings account will look. Also, you should have a savings account that is separate from your checking account, so you’re less tempted to spend the money you should be putting away for rainy days.
What budget issues do you struggle with? Do you have some savings tips that could help others? Let us know!