Chapter 3: Building a Budget
A budget is essential to living within your means and saving enough to meet your long term goals. One common budgeting method is the 50/30/20, it breaks down like this:
Fifty percent of your take-home pay or net income (after taxes) goes toward living essentials, such as rent, utilities, groceries, and transport.
Thirty percent is allocated to discretionary expenses, such as dining out and shopping for clothes.
Twenty percent goes toward the future. Investing, paying down debt, saving and emergencies fund.
However, a one size fits all budget doesn't work for everyone. Another method is breaking your spending down into three categories: Fixed, Variable, and Investable.
Fixed - Expenses that remain constant month to month such as rent, utilities, car payment, car insurance, phone bill, subscriptions, etc…
Variable - Groceries, eating out, gas, personal spending, unexpected expenses.
Investable - Everything left over after Fixed and Variable spending has been taken care of. This money is used to fund savings and emergency funds and to be invested.
This type of budget works best for individuals with a low expense to income ratio. If your fixed expenses are less than 50% of your income there is no reason to be spending 30% on shopping and personal spending and leaving only 20% for investing. Ideally your Fixed expenses make up less than 35% of your income and your Variable spending makes up 15%. Leaving you 50% of your income to save, invest, and pay off debt. The more you invest the more return you will see, the sooner you start the better.
Once you've established the budget method you're going to use you actually need to implement it. Thankfully there are an abundance of budget apps out there that will keep track of everything for you. The two most common ones are You Need a Budget and Rocket Money. Excel and Google Sheets can also be useful tools to track one's income, expenses, and calculate anticipated income tax.