Budgeting your money helps you avoid financial hardships and afford bigger purchases, like a downpayment on a car or a home. Having a good budget not only helps you save money, it increases your net wealth and helps you get out of debt.
If you only learn one thing about saving money, you should learn to create a successful and effective budget.
There are a handful of ways to create a budget, but all budgeting strategies have the same goal in mind: save money and avoid overspending.
In this article, we discuss how to create an effective and simple budget using Elizabeth Warren’s 50/30/20 rule and save money on essential expenses, like food, housing and clothing.
Spend 50 Percent On Needs
Before creating a budget, you need to identify your net pay. To do this, calculate how much you make per month after taxes. This number is your starting point for your budget.
Next, you want to determine what needs you’ll need to account for–this portion of your budget is represented by the “50” in the 50/30/20 rule. Warren recommends that you spend roughly 50 percent of your net pay on your needs.
General needs include:
- Food
- Housing
- Utilities
- Transportation
- Insurance
- Minimum loan payments
- Child care or other caretaker expenses
Go through your bank statements and make a list of all the items that fit into these categories, then add them all up. Keep track of your spending using technology or by manually writing them down–this will be key to understanding your budget.
Another strategy you can use for materializing your budget is by using the envelope budgeting method. This strategy can be combined with the 50/30/20 rule to make it easier to categorize your budget.
Envelope budgeting is exactly what it sounds like–the strategy focuses on allocating specific amounts to each category of your budget to ensure you’re not overspending in any one place.
Withdraw cash and set aside a given amount for one portion of your budget. This money will be used only to pay for the expenses related to that category.
For example, if you make $5,000 per month, you should be spending no more $2,500 on living expenses. Set aside $2,500 in an envelope and withdraw that cash when you’re ready to pay for rent, insurance, utilities or food. You can take this a step further and create multiple envelopes with labels for each category within your necessary expenses, like allocating a specific amount for food, housing and insurance separately.
Spend 30 Percent On Wants
One key aspect to creating a successful budget is identifying your wants from your needs. Your wants include any expenses that aren’t necessary for living comfortably. Things like eating out at restaurants, vacationing and buying expensive gifts.
To find out how much you’re spending on your wants, go through your bank statement and identify all the expenses that don’t fall under the “needs” portion of your budget.
After you’ve identified what your wants, you want to allocate no more than 30 percent of your budget to those expenses. That means limiting yourself on your luxurious expenses so you can have room to save money for investments and retirement.
While this strategy may feel restrictive at first, you’ll likely experience the freedom to spend 30 percent of your income on the things you want without feeling guilty when it comes time to pay for rent.
Save 20 Percent of Your Net Pay
After identifying your needs and categorizing your wants, you want to save the rest of your income in separate accounts.
Here’s how you should save the rest of your income (in order of importance):
- Emergency Fund: save 3-6 months of expenses in a liquid savings account in case of emergencies. This money will be used in case anything unforeseen happens, like the loss of a job or unexpected medical expenses.
- Debt Repayment: debt keeps you from building wealth. Aim to pay off all your debt as soon as possible so you can focus on building wealth through investments. When available, spend any excess cash your wants category on repaying your debt to reach a positive net worth sooner rather than later.
- Investments: Focus on getting a 401k match first if your employer offers one. If they don’t or you have money left over, contribute to a Roth IRA account.Invest the rest of your money into stocks and index funds. You want your total budget at the end of the month to reach zero, so every dollar is either being spent consciously or being put to work with investments.Set up automatic investments and withdrawals from your checking account to help meet your financial goals. For example, if you want to max out your Roth IRA every year (the current limit is $6,000), set up an automatic withdrawal for $500 a month.
Useful tools to Save on Wants:
One of the easiest and most effective ways to save money on your purchases, big or small, is to use online shopping tools such as apps or browser extensions to help automate your savings.
Here are a few shopping tools you’ll want to use to help you stay within your budget:
- Paribus monitors your online shopping purchases and automatically asks retailers for money back if the price of the item you bought drops (most retailers agree if you made your purchase within 14 days of the price drop).
- Honey is a browser extension that automatically applies coupon codes to your purchases at checkout. It also tracks historical price changes on Amazon, so you know if you’re buying an item at historically high or low prices.
- GreenToe: If you’re making an expensive electronic purchase, GreenToe is the way to go. GreenToe is a middleman that allows you to set a price point for an item you want, and retailers compete against each other to meet your price – it can save you thousands.
Avoiding Dynamic Pricing Algorithms.
Online merchants use dynamic pricing algorithms that enable them to show different prices to different customers according to your location, browsing habits, spending habits and current demand for the product. This data allows retailers to determine your price point so that you might be seeing products at higher costs than other people.
To outsmart dynamic pricing algorithms, consider downloading a separate browser for online purchases. Additionally, you’ll want to log out of all email accounts, clear browsing history and cookies regularly, and shop in incognito mode.
Becoming an expert budgeter takes time and practice. Understanding your needs, wants, spending habits, and how much to invest or spend on debt repayment can help you create a budget that complements your lifestyle.
**Resources**:
- https://www.daveramsey.com/blog/the-truth-about-budgeting
- https://www.everydollar.com/blog/budgeting-tips-every-budgeter-needs-to-know
- https://www.nerdwallet.com/blog/finance/how-to-build-a-budget
- https://www.lifehack.org/articles/money/10-online-shopping-tips-save-money-while-scoring-major-discounts.html
- https://thekrazycouponlady.com/tips/money/save-money-shopping-online
