Not all your money is a fair game for fun things – you need to deal with the bills and debts first. Add savings to the mix and you will see the need to spend less than what you earn.
“We always want less money to go in,” says Amy Irvine, CFP, founder of Rooted Planning Group.
So before your next visit to the mall, determine a budget which takes into account some of your wants as well as your needs.
How Much Money Should You Spend?
When it comes to how much you should spend, NerdWallet advocates the Budget 50/30/20. With this formula, you aim to spend 50% of your take home pay on needs like rent and insurance, 30% on needs like gym memberships and vacations, and 20% on debt repayment. and savings.
Needs come before wants, and your specific expenses will be based on your income. Here’s how to do it.
Before building a budget
Track all your spending at a glance to understand your trends and spot opportunities to save money.
Start with your take-home pay
You only have an amount of money to work on if you stick to spending within your means. Your starting amount is your net revenue, after taxes and payroll deductions added. This figure determines how much you can afford to spend on everything from rent to groceries.
Not enough? You can try to earn more money – get a raise, change jobs with a higher salary or accept additional work. To increase your current salary, find ways to to save money, such as carpooling to work or using coupons.
Determine how much you need for key expenses
If you spend everything you bring in for what you want, you won’t be prepared for the future.
Start with the 20% for savings and debt. Pay yourself first by setting aside money for an emergency fund and retirement. Then turn to debt. If you have past due credit card debt, for example, try to reduce it.
Then subtract your regular bills. If your monthly take-home pay is $ 5,000, spend no more than half that amount, or $ 2,500, on essential expenses such as rent and utilities.
Make room for fun money
You have now used up a substantial portion of your income, but it’s crucial to give yourself room to breathe. Saving for the future is important, but like a restrictive diet, trying to stick to a budget that isn’t fun in the moment isn’t realistic. This is where the 30% of “desired” spending comes in.
Don’t wait until retirement to buy things that make you happy. You shouldn’t be saving “for that magical finish line,” how well you’re finally starting to live, says David G. Metzger, CFP, founder of Onyx Wealth Management LLC in Illinois.
“It’s important to think about what we can do right now to enjoy life a bit and then just fit it into the budget,” says Metzger. Build in room for needs that are important to you.
But remember, the formula can’t go over 100%, so you will have to sacrifice in some areas if you overspend in others. You can’t spend 30% of your salary on desires if you already have 90% commitments on bills and savings.
Make changes to your spending along the way
Whether it’s a move to a new city or a rising cost of living in your hometown, your spending fluctuates over time.
If you run out of funds at the end of each month, immediately review your spending habits. Check your credit card and bank statements to identify spending patterns; don’t forget the withdrawals you have made.
Try to throw all of your receipts in a jar to identify areas where money is slipping out of your budget, says Steve Sivak, CFP, the managing partner of Innovate Wealth in Pennsylvania.
The more honest you are about how you allocate your money, the better off you will be.
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