What does creating a realistic budget really mean?
When it comes to building a budget, there are three things you need to consider: 1) your monthly expenses, 2) debt/savings, and 3) income. Using these calculations, you will be able to put together your budget, also known as a spending plan, and visualize your ultimate savings potential.
Let’s start with your needs, i.e. your unavoidable or mandatory expenses or non-discretionary expenses. These expenses include everything from rent and utilities to subscriptions and transportation to groceries and so on. Consider debt a non-discretionary expense as well, whether that be mortgage or car payments, perhaps credit card bills, too. However, it’s not where you stop...
Are you saving money, losing money, or breaking even? Your budget is not a set it and forget it thing – revisit your budget monthly to cut costs and create room for greater opportunities to save for the future; Maybe that includes adjusting your discretionary expenses, also known as wants. This includes entertainment, dining out, spa visits, and the like. The goal is to live within your means, which means having more money at the end of the month. Uncovering opportunities to save for financial goals is the objective of a well-working budget. A general rule of thumb is to allocate 50% of your paycheck toward your needs, 30% discretionary expenses, and 20% toward debt/saving. Challenge your savings potential and “spend” 30% on debt/savings and 20% on discretionary expenses instead!
Once you create a successful budget that accounts for long and short-term savings goals, ensure you set aside extra funds in case of an emergency. Ideally, you should work toward saving three to six times your monthly budget in a designated savings account (name it something special to remind you what you’re saving for like Rainy Day Savings or Emergency Fund).
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Figure out how much you can put away in savings based on your monthly income and spending.
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