How to budget – 5 easy steps to get you started. 

Budgeting is essential when running a household, but it can also be challenging to master.

 

Here are some tips to get started with budgeting:

 

1. Start Small

Start small by setting aside enough to cover all of your basic needs. This should be at most 50% of your after-tax monthly income.   

Once you’ve mastered that, you may want to set aside about 20% of your after-tax income, put it into a savings account, and build up an emergency fund. 

 

The remaining 30% is your flex money. Use this for entertainment or towards a goal. 

This is the 50/20/30 Rule and budgeting basics in their simplest form. 

 

2. Track Spending

If you discover that your basic needs are more than 50% of your net monthly income. You have two choices.

 

a. Earn more monthly income. 

 

b. Scale back on your spending habits. 

 

But where to start? Start with tracking everything you spend money on every single day.

 

Write down every purchase you make so that you can see exactly where your money goes. As part of your budgeting process, Review your credit card statements for insight into how much online shopping you do. Flag things like Groceries, Clothing, and Utility Bills. Items such as these should not be on high-interest credit cards.   

 

3. Set Up Goals

Set goals for yourself based on your current situation. For example, maybe you want to save $500 per month for your next vacation.

 

Or perhaps you want to pay $200 per month towards your retirement fund. Whatever your goal is, write it down and stick to it!

 

4. Create a Monthly Plan

Create a monthly plan that lays out your entire month’s worth of expenditures.

 

First, include all your fixed and housing costs, including rent/mortgage, utilities, insurance, groceries, etc. Next, add in all your variable costs, including automotive and transportation expenses, public transportation costs, entertainment, dining out, unexpected health care costs, etc.

 

5. Stick To It

Stick to your budget until it becomes a habit. Don’t let yourself go over budget; otherwise, you won’t feel motivated to stick to it. And if you find yourself falling behind, first try cutting back on your spending rather than figuring out how to increase your income. In some cases, this may be the answer.

 

It becomes a habit when you have mastered your budget for 3-4 months. By then, you are ready to get serious. There are several popular Budgeting Techniques and Budgeting Methods.  

 

The 50/20/30 plan is a top-rated budget and a great place to start getting your household finances in order. 

 

What Is the 50/20/30 Budget Rule? 

 

The 50/20/30 Rule is an intuitive, simple, flexible plan to help people reach their financial goals.

Which are just a few reasons for its popularity. In addition, the Rule is a template intended to help individuals manage their money and save for emergencies and retirement. 

 

A good budget plan is a foundation for creating semi-passive income and lasting wealth. This last point is significant and is a theme throughout my blog. It is the grassroots principle why I have created this blog.

 

Simply put, a reasonable budget will help you get your spending habits under control.

 

It can help identify your blind spots when it comes to the goals of saving and investing for the future. It may improve your physical and mental health through some attractive side benefits. I’ll point those out later in this article. 

 

The 50/20/30 Rule Explained.

The 50/20/30 budget rule is an intuitive and straightforward plan to help people reach their financial goals.

 

The Rule states that you should spend up to but not exceed 50% of your after-tax monthly income on needs and financial obligations.

The remaining half should be split between 20% savings and debt repayment and 30% for Goals and wants.

 

The Rule is a template intended to help individuals manage their money, save for emergencies, and build a nice retirement nest egg. 

 

Let’s Break down the 50/20/30 Rule and Budget Categories. 

50%: Needs (Food, Obligations, Loans, Monthly Bills)

Needs are those bills that you absolutely must pay and are the things necessary for survival.

 

These include rent or mortgage payments, car payments, staple groceries, home insurance, health insurance, minimum debt payment, and utilities. These are your “must-haves.”

 

Be careful not to confuse needs and wants. Examples of wants. TV is considered entertainment, not a necessity of life. Although it could be argued it is for mental health reasons. LOL.  

 

And you know this already, but to clarify, Starbucks, fast food, skip the dishes, and dining out are all wants. 

 

Your Gym Membership is a desire (a want). You do not need it to survive.  The same with your luxury SUV, a want, not a need. 

 

The goal is to reduce your monthly expenses to fit your monthly budget. Half of your after-tax income should be all that you need to cover your needs and obligations. You may need to downsize your lifestyle if you spend more than 50% on your needs. Yes, sacrifices will have to be made. 

 

20%: Savings

Allocate 20% of your after-tax income to savings goals and long-term investments.  

 

Your priority in this category is to have at least three months of emergency savings in case you lose your job or an unforeseen event occurs. If emergency funds are ever used, the first allocation of income should be replenishing the emergency fund account.

 

After that, focus on debt repayment. While minimum payments are part of the “needs” category, any extra payments reduce the principal and future interest owed, saving you money in the long term. 

 

Next, I recommend that you make regular IRA/RRSP contributions. Research self-managed RRSP accounts, starting with Basic S&P 500 ETFs and Gold ETFs as your core investment options. More on that in another post. 

 

Importance of Savings?

Americans are notoriously bad at saving, and the nation has exceptionally high debt levels.

 

As of the third quarter of 2020, Americans have $14.9 trillion in total debt, which includes $756 billion in credit card debt. The personal savings rate in Jan. 2022 was 6.4%.

 

In fact, according to a recent study conducted by Bankrate, only about half of the adults surveyed had enough saved up to cover three months of living expenses. And while the average American owes nearly $1.5 million in student loan debt, most people don’t even have enough put away for a down payment on a house. 

 

Canadians are just as bad, perhaps worse. This whole live-in-the-moment nonsense does not work for finances. 

 

Unless you want to explore “van life” at age 65, you must get disciplined and create a savings plan. The Sooner, the Better.

 

Either way, you will need some savings to pay for fuel as you travel in your van.   

 

Your future self will thank you for becoming a disciplined saver early.   

 

30%: Wants 

Wants are all the things you spend money on that are not essential.

 

Also called “Discretionary Spending.” This includes dinner and movies, that new handbag, tickets to sporting events, vacations, the latest electronic gadget, and ultra-high-speed Internet.  

 

If you boil it down, anything in the “wants” bucket is optional.  

 

For example, you can work out at home instead of going to the gym, cook instead of eating out or watch sports on TV instead of getting tickets to the game.  

 

All the wants are all those little extras you spend money on that make life more enjoyable.    

 

And that’s ok. The beauty of the 50/20/30 Rule is that it has the flexibility to fit your lifestyle and fulfill your life goals. 

 

The wants category is your “flex” category to speed up your debt reduction or enjoy life more. Whatever your priority, this is where you find that money. 

 

Where did the 50/20/30 Rule come from?

 

It was first introduced by Dave Ramsey, who has been helping families with their finances for more than 30 years. He says he came up with the idea while working at his dad’s business, where they had a lot of employees and were struggling financially.

 

His father told him that if he could only find a way to keep his expenses below 50%, he could afford to give himself some freedom.

 

Senator Elizabeth Warren popularized the “50/20/30” budget rule in her book, All Your Worth: The Ultimate Lifetime money plan.

Benefits of the 50/20/30 Budgeting Rule

• The 50/20/30 Budgeting Rule will help you get your priorities flushed out and put a flexible strategy in place to achieve your financial goals. 

• Being on a strict budget can help you lose weight and live healthier. For example, instead of buying a take-out lunch daily, start taking healthy, simple lunches to work. It’s much less expensive, and your waistline will love you. 

 

And tracking your expenses, you may discover the actual cost of bad habits like smoking and drinking. For example, having a few wines or beers every afternoon after work seems innocent.

 

But, as you will quickly discover, you may be spending a small fortune on this luxury. 

• A reasonable monthly budget will reduce stress and improve your mental health.  

“Americans are notoriously bad at saving, and the nation has extremely high levels of debt. As of the third quarter of 2020, Americans have $14.9 trillion in total debt, which includes $756 billion in credit card debt. The personal savings rate in Jan. 2022 was 6.4%.” – Investopedia. 

Carrying this kind of financial weight is very unhealthy. And what’s worse, it’s typically self-inflicted. We often don’t see our debt load creeping up on us. Instead, we tell ourselves, “we can afford it,” or “I will figure it out later .” You know the result of this thinking. Suddenly your credit cards are maxed out, and so is your financial stress level. 

 

With a reasonable budget in place, you will know whether you can afford it. And if you can’t afford it right now, you have a flexible working plan to save up for your desired purchase. The result is less stress and happier life.  

What is an alternative to the 50/20/30 Budget Plan?

 

The Envelope system

Envelope systems are one of the most popular ways to track expenses.

 

If you’ve never used them, they are easy to set up and provide a simple way to visualize where your money goes.

 

In addition, they help you keep track of what you spend each month, so you don’t forget about it when tax time comes around.

 

Why the Old-School Cash Envelope Method (aka cash-stuffing) Is Trending on TikTok

And while the idea behind the cash envelope system seems pretty straightforward, there’s much more to it than meets the eye.  

 

In fact, according to personal finance experts, there’s a reason why the old school method is coming back around again, besides being very easy to implement.   

 

The cash envelope method is coming back, thanks partly to TikTok influencer @rebeccabbudgetguru.  

 

In her videos, she explains how to make your money go further by putting cash into designated categories such as savings, bills, groceries, etc.  

 

She says you shouldn’t spend money unless you’ve put some aside for that category and purpose.

 

In addition to being a great way to save money, there are many benefits to the cash envelope method.

1. It’s straightforward to Learn. You don’t need fancy software; just use a calculator and a piece of paper.
2. It forces you to think about where your money goes.
3. It helps you track spending and prioritize your cash flow. 

 

While Cash-stuffing videos are fun to watch, they may not be the right strategy for everyone.

 

The 50/20/30 Rule is arguably the more appropriate approach for many individuals trying to get a grip on their spending habits. 

80/20 Plan for Children and Teenagers. 

This is an excellent way to teach your children how to budget.  

 

It is so straightforward; that a 10-year-old can understand this. 

 

80% of their money goes in one envelope for their savings goal. Whatever it is. Perhaps a new bicycle, Xbox games, saving up for a car, new sporting equipment, etc.  

 

20% goes towards wants, buying whatever they desire, comic books, pizza for their friends, dating, whatever, as long as it’s within the bounds of your family rules. 

 

As they become young adults and start their journeys. They can easily upgrade to the 50/20/30 Rule.

 

And they have learned and practiced how to be disciplined with their money. So that’s a huge head start in life. 

Key takeaways of the 50/20/30 Budgeting Rule

• It helps you identify what you truly value and what your actual financial priorities are. 
• It allows you to focus on and achieve one goal at a time.
• It allocates money to Savings. Something that the majority of us are struggling with.
• It allows you to allocate money to your must-have retirement savings account.
• It forces you to take control of your finances. No more excuses, but real action. 
• It gives you a sense of accomplishment. 
• It teaches you to become frugal.
• It helps you become financially disciplined. No more unplanned buying sprees online. No more guilt after purchasing because now every purchase you make is planned and accounted for.
• It helps you understand the actual cost of living. No more guessing that you can afford your desired purchase.
• You will never say to yourself again, ” I am pretty sure we can afford it” You will know, without doubt, if you can fit it in the budget.
• A significant takeaway is that the 50/20/30 Rule gives you confidence, knowing you have a budget plan. And working on this plan will allow you to meet and or exceed your financial goals, including the ability to retire with financial freedom. 

And a little extra bonus, you now have an essential life skill you can pass to your family.