I grew up in a household where the word “budget” had a negative connotation. My mom in particular hated the idea of budgeting because to her it meant less freedom and no fun (for her this was, and still is shopping). The reality is, budgeting is just about being aware of and honest with yourself about your money situation. It’s about having control, and learning how to balance savings, expenses and lifestyle. And just because you need to save for priorities like retirement and emergencies, doesn’t mean you can’t enjoy your hard earned money on the things you value the most (travel, shopping, wine, giving, etc.). In fact, it’s important to make a place for these things in your budget.
When it comes to budgeting, I recommend the 50/20/30 rule. Here’s how it works:
Take Home Paycheck (after taxes, 401k savings, insurance, etc):
1. Basic Living Needs: 50%
50% of your net paycheck should cover your living expenses, e.g. rent, mortgage, insurance, utilities, transportation, and groceries. These are the basics that you need to get by. You should include debt payments in this bucket.
2. Financial Goals: 20%
This is the most important bucket – your short-term, mid-term, and long-term goals. These contributions will help secure your financial future. Goals could include emergency fund, paying down debt, additional retirement savings, new house, travel, college funds, etc. It’s best to have separate accounts that are earmarked for your goals. A financial advisor can help you set up accounts and/or give you advice on how much should go in each account monthly.
Reverse budgeting (saving first and living off the rest of your income) will help you save consistently and build wealth over time. Set up your paychecks to automatically transfer money to your goal accounts. Consider trying this strategy for a month or so, and then see how close you can get to the 50/20/30 framework. If your numbers don’t perfectly align with the percentages, that’s okay. The point is to prioritize, take control, build awareness as well as good habits.
3. Freedom Money: 30%
This is my favorite bucket – your FUN money! Want to get your hair done, buy some new shoes, go out to eat with friends, sign up for a spin class? Go for it! Use the 30% that is left over to live your best life. You can either break out your 30% number weekly or monthly. You can use money management apps or a spreadsheet to help track your weekly spending. Schedule a weekly time to review your spending to see how you’ve done.
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Cash-flow management is a key component to any financial plan. If you are interested in learning more about how to better manage your cash-flow or if you would like more information on how you can implement a Wealth Plan, contact us at or book an appointment directly at www.wealthbllc.com.
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