For some people, budgeting is a difficult and scary prospect. The thought of allocating your income into categories can be a daunting task. Most of us consider budgeting from a negative perspective. The thought of not having our creature comforts – like morning coffee or play money – can make budgeting seem not so user friendly. The trick is to change your thinking around to the positive and realize that if you have a budget you can factor in those things you enjoy, and rest assured your bills are covered too. It should also include a certain amount to be set aside for savings. After all, at some point you will reach retirement age and you need to be ready when that time comes.
1) 50/20/30 Method
Here’s a relatively simple method which was made popular by Senator Elizabeth Warren, a bankruptcy expert. The plan is 50% of your income should go to essentials. This means your basic bills that are necessities to maintain your household. This includes rent or mortgage, heat and electricity, phone and Internet services, credit cards and car payments, insurances and so on. The next step is to set aside 20% for investment savings. This could be a 401k, an interest-bearing savings account like an IRA, and reducing debt such as student loans and credit cards you may have maxed out. The last 30% of your income is then reserved for personal spending. This can include dining out, entertainment, vacations, etc. It should also include creative ways to cut down on spending by shopping smarter – such as shopping the sales and using coupons for groceries.