Creating a budget doesn’t have to be a complicated affair.
Of course it may seem too involved, too time consuming, or worse, too restrictive””limiting your ability to spend “freely.” But implementing a budget is easier than you think.
First off, I hate the word “budget.” The term conjures up feelings of deprivation, constantly reminding us of the things we can’t afford.
But don’t think of a budget as financial straight-jacket. Instead, think of your budget as a freedom plan. By helping you direct your spending it helps free up the necessary cash needed to pay off debt, build a retirement fund, and achieve your other financial goals.
But how do you go about it? How much should you spend on groceries, entertainment, and clothing? Should you concentrate on paying off debt or building savings?
In their book, All Your Worth: The Ultimate Money Plan, authors Elizabeth Warren and Amelia Warren Tyagi provide a simple budget solution.
Their 50 ““ 30 ““ 20 balanced money formula suggests that 50% of your take home pay should be used to cover necessities like food, shelter, and transportation. Thirty percent should be directed toward your “wants,” those things that are nice to have but not absolutely essential like cable television and dining out. Finally, twenty percent should be dedicated to paying off debts and building savings.
50 – 30- 20 BALANCED MONEY FORMULA
50% of take home pay spent on NECESSITIES:
Rent / Mortgage, Transportation, Groceries, Health Insurance, Utilities, Basic Clothing
30% of take home pay spent on WANTS:
Dining Out, Cable TV, Smart Phone, Designer Fashions, New Car, Vacations
20% of take home pay spent on DEBT REPAYMENT AND SAVINGS:
Student Loans, Credit Card Debt, Emergency Fund, College Fund, Retirement Account
What I love about the 50 – 30 – 20 balanced money formula is its simplicity. Sometimes simple budgets that get used are better than complicated budgets that gather dust.
Additionally, the balanced money formula allows you to take care of your responsibilities while also allowing you to have fun and spend money on things you enjoy.
And because 30% of your take home pay is earmarked for your “wants,” it requires you to prioritize. You can’t have it all. Restricting the money you can spend on “wants” forces you to choose only those things that bring you and your family the most satisfaction.
Do you spend the money on family vacations or going to the movies each week? Do you ditch the cable or cancel your extended cell phone plan? By forcing you to make these choices the balanced money formula ensures that there’s money left over for saving, investing, and paying off debt.
Of course the formula may not work for everyone and for some people it may take a little bit of work. Getting your essentials under 50% of your take home pay, for example, might require couples to give up the second car, refinance a mortgage to take advantage of low interest rates, or downsize their living arrangements.
But in the end such a budget can be exactly the freedom plan you need to achieve financial independence.
BMWK, do you budget? How do you do it? What type of plan do you follow?