Budgeting one’s personal finances is a skill that will help you throughout your entire life, from being a college student all the way into retirement. There are many floorplans and guides about the proper way to portion money if you want to achieve certain short- and long-term savings goals, but the general rule is to follow a 50/30/20 allowance.
First, you look at your after-tax income and divide your spending needs into three groups: essentials, wants, and savings. Your essentials should take up around 50% of your budget, wants should comprise around 30%, and savings should equal around 20%.
The highest priority group, the essentials, are what you should examine first. Set aside no more than half your money and take a look at what constitutes essential. This includes housing, whether it’s rent or a mortgage, followed by all of your essential food needs, such as the grocery store. If you require anything for transportation, it also belongs in this category. This includes public transportation and everything that entails or owning or sharing a mode of transportation and all of its related costs.
Your monthly utility bills also fall under the essential category. These include water, sewer, power, telephone, trash collection, and in today’s climate, it includes internet access.
After examining the essentials, 20 percent of your income should be dedicated to a savings plan. That might not be the same idea for everyone. There are many different types of protective safety nets, such as 401K plans, savings accounts, and brokerage funds. The reason this is done before the last step is so that you can have a perfect handle on exactly what you can count on for the future.
Moving on to the next category, it’s time to examine the things you want, but don’t necessarily need. These are mostly lifestyle decisions. Many people are happy to trade some of their savings for discretionary activities and entertainment. Some examples might be trips to a coffee shop, having a multi-channel cable package, gym membership, dining out, weekend trips, or a fancy cell phone plan. Regardless of how you see each of these luxuries, make sure to budget only up to 30 percent of your income for enjoyment. Remind yourself that small sacrifices now will help you down the road in much bigger ways.
By sticking with this formula, you will be able to find comfort in knowing that your future will be there for you, which is a very relaxing thing to know.