In this article:
Why it's important: A budget is a plan for how you will spend your money each month. It can help you track your income and expenses, make sure you're not overspending, and reach your financial goals.
How to create a budget: There are many different ways to create a budget. One popular method is the 50/30/20 rule, which allocates 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment.
How to stick to your budget: Once you've created a budget, it's important to stick to it. Here are a few tips:
Track your spending: Tracking your spending is the best way to see where your money is going and make sure you're staying on budget.
Make a plan for your money: Once you know where your money is going, you can start to make a plan for how you want to spend it.
Set financial goals: Having financial goals will help you stay motivated to stick to your budget.
According to the New York Federal Reserve, the average household debt level in the United States in the second quarter of 2023 was $17.06 trillion, an increase of 0.9% from the previous quarter. There are 129.82 million households in the United States according to the 2020 census, so the average household debt level per household is over $131,000. The average credit card debt per household was $986, with an average interest rate of 18.25%. If you only pay the minimum amount on your credit card debt, it could take you 20 years to pay it off and you would end up paying over $7,000 in interest.
This is a significant amount of debt, and it can be difficult to pay off. It can also get in the way of saving for life's major milestones - marriage, college, retirement, new car, new house, children, etc. It is important to create a budget and stick to it in order to pay off debt and save towards financial goals.
Unfortunately, only 30% of Americans report having a budget. This means that most Americans are not actively planning for how they will spend their money, which can lead to financial problems.
The average savings rate for Americans is 5.7%, which is well below the recommended target of 15-20% of monthly income. This means that most Americans are not saving enough money for retirement or other financial goals.
Creating a budget is essential for financial success. It can help you:
Avoid debt: When you have a budget, you're less likely to overspend and go into debt.
Save money: A budget can help you save money by helping you track your spending and identify areas where you can cut back.
Reach your financial goals: Whether you're saving for a down payment on a house or retirement, a budget can help you reach your financial goals faster.
How to create a budget
There are many different ways to create a budget. One popular method is the 50/30/20 rule.
This rule allocates your income as follows:
50% for needs: This includes essential expenses like housing, food, transportation, and healthcare.
30% for wants: This includes discretionary expenses like entertainment, dining out, and travel.
20% for savings and debt repayment: This includes saving for retirement, paying off debt, and building an emergency fund.
Note: Fidelity Investments recommends that you save 15% of your pre-tax income for retirement. This includes employer contributions to retirement accounts, such as 401(k)s and 403(b)s. The calculation can become complex when you consider that some expenses in each category can be paid using a combination of pre-tax and post-tax dollars.
To create a budget using the 50/30/20 rule, start by calculating your monthly income. Then, multiply your income by 50% to get your monthly budget for needs. Multiply your income by 30% to get your monthly budget for wants. And finally, multiply your income by 20% to get your monthly budget for savings and debt repayment.
Once you have your budget categories, you can start to allocate your income to each category. For example, if your monthly income is $5,000, your budget for needs would be $2,500, your budget for wants would be $1,500, and your budget for savings and debt repayment would be $1,000.
Need help? Schedule a consultation with us and we can do the math for you and leave you with a detailed calculator you can work with.
How much should you set aside for emergencies?
The Consumer Financial Protection Bureau (CFPB): The CFPB recommends that you save at least 3-6 months of living expenses in an emergency fund. This will help you cover unexpected expenses, such as a job loss or medical emergency.
Another consideration is the liquidity required within your emergency fund. Should the fund be only cash? Should it be invested? If so, what type of products are appropriate to maintain the proper liquidity and risk profile for proper availability of the emergency fund when you need it.
We recommend one month of expenses as cash or money market, one month of expenses in fixed income instruments that can be converted to cash within a few days and have low risk, and four months of expenses in a basket of low risk mutual funds which has some growth potential.
How to stick to your budget
Once you've created a budget, it's important to stick to it. Here are a few tips:
Track your spending: Tracking your spending is the best way to see where your money is going and make sure you're staying on budget. There are many different ways to track your spending, such as using a budgeting app, spreadsheet, or simply writing it down in a notebook.
Make a plan for your money: Once you know where your money is going, you can start to make a plan for how you want to spend it. This could involve setting aside a certain amount of money each month for savings or debt repayment, or creating a budget for specific expenses, such as groceries or entertainment.
Set financial goals: Having financial goals will help you stay motivated to stick to your budget. Whether you're saving for a down payment on a house or retirement, setting financial goals will give you a purpose for budgeting.
Take control of your finances
Creating a budget and sticking to it is essential for financial success. By following the tips above, you can create a budget that works for you and helps you reach your financial goals.
Additional tips for sticking to your budget:
Pay yourself first: One way to make sure you save money is to pay yourself first. This means setting aside a certain amount of money each month for savings before you pay any other bills.
Avoid impulse purchases: Impulse purchases can quickly derail your budget. If you see something you want, wait a few days to buy it. This will help you avoid making impulsive purchases that you'll later regret.
Pretend that credit cards are an extension of cash and pay them off immediately: Using cash instead of credit cards can help you stay on budget because you're more likely to be mindful of how much you're spending when you're using cash. When you're using credit cards, only use them for the rewards and exit every month with a zero-balance. Pretend that spending on credit cards is like spending your cash so you do not commit to debt beyond your ability to pay it off every month to avoid interest.
Review your budget regularly: Your financial situation will change. You should review the progress against your budget monthly and review the targets set within your budget quarterly. If you're doing better in an expense category, pay your savings the excess first to reduce the temptation for an impulse buy.
Plan to reward yourself for good financial behavior: If you are meeting or exceeding your budget, design a reward into the next fiscal year's budget like that culinary class you've always been wanting to take or that trip to Europe on your bucket list.
The information presented in this blog post is intended for informational purposes only and should not be construed as financial advice or an offer to buy or sell any securities. The analysis and opinions expressed are based on publicly available data and the author's interpretation of current economic trends. However, they do not take into account your individual financial circumstances, risk tolerance, or investment objectives.
Investing involves inherent risks, and past performance is not necessarily indicative of future results. The value of your investments can go down as well as up, and you could lose some or all of your principal. Before making any investment decisions, it is crucial to consult with a qualified financial advisor who can assess your specific situation and recommend suitable investment strategies based on your risk tolerance and investment goals. Always conduct your own thorough research and due diligence before making any investment decisions.
By accessing and using this information, you acknowledge that you understand and agree to the terms of this disclaimer.
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