The key to a well-rounded budget is finding a way to pay for all of your necessities, while still having money to pay off debts, save for retirement, cover any emergencies, and have a little fun. Thinking about how you can possibly stretch your dollars out to cover everything can be stressful and daunting. But the only way to successfully cover all of these aspects is to create a budget. A budget allocates every dollar you have so you can have more financial freedom and less stress.
Setting Up Your Budget
First, figure out your net income, which is how much you bring home after taxes and any other automatic deductions from your check. Next, you’ll choose a budgeting plan. A variety of recommendations are out there, but any budget must cover all of your needs, some of your wants and have enough remaining to set aside for emergencies and your future.
An easy and popular budgeting plan to follow is the 50/30/20 plan, which says to spend about 50 percent your take-home pay on necessities, 30 percent or less on wants, and at least 20 percent on savings and debt repayment. Don’t worry if your proportions aren’t perfect. It may take time to get your must-haves under control.
Needs and Wants
Necessities include housing, groceries, basic utilities, transportation, insurance, health care, childcare, and minimum loan payments. If the monthly total for your must-haves section is greater than 50 percent, you need to spend less in the wants section of your budget for a while. You can also cut back on necessities by spending less on groceries, reducing your energy consumption, or finding a less expensive cell phone plan or car insurance.
While eliminating debt as quickly as possible is a great idea, be sure to leave room in your budget for fun. Standard wants include dining out, purchasing gifts, traveling, and entertainment. Just like you should leave room in your diet for dessert, if there’s no room for fun in your budget, you’re less likely to stick with it.
Savings and Debts
The final 20 percent of your budget should cover any emergencies or unexpected spending, savings for retirement, and paying off debts. There are some priorities when you’re allocating money in this section, and the first priority is to start an emergency fund. You’ll want to save up to six months’ worth of living expenses, along with some extra cash in case your car needs a new part or your computer crashes. These emergencies cause more debt if you don’t have money set aside to cover them.
Next, eliminate what NerdWallet calls “toxic debt.” This includes high-interest credit card debt, personal and payday loans, title loans, and rent-to-own payments. Next, work on unsecured debts, which include low-interest credit cards, medical bills, and bank loans. Saving 15 percent of your gross income for retirement is the next priority. The final priority is extra debt repayment, which refers to making payments beyond the minimum amount. For example, you can increase the amount you make on your car payment to pay it off faster.
Once you have your debt eliminated and are comfortably setting aside money, consider saving for expenses that aren’t emergencies but will inevitably occur, such as upgrading your washing machine or purchasing a new car. It’s better to set aside money to cover these expenses than to have to finance them with a loan or credit card.
Another way to use this money is to cover the cost of remodeling. Remodeling to add equity to your home is a great way to spend money to make money. After staying in your home for a decade or longer, things will probably need upgrading. The cost of remodeling can vary, but most projects have a good return on invest (ROI), so remodeling typically adds equity. Bathroom or kitchen remodels are the two most popular projects because these rooms make or break the sale of a home and have a great ROI.
If you want to achieve financial security, you must create a well-rounded budget that not only guarantees that you cover your monthly expenses, but ensures you are prepared in the event of emergency. You also want to be able to retire comfortably. So while sitting down to set up a budget can be daunting, it pays off in the long run.
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