At least 40% of Americans don't have enough money to pay for a $400 emergency. That means almost half the population would have to borrow money or sell something to cover a car repair, for example.
It shouldn't come as a surprise, given increasing cost of living and slow wage growth. The truth is financial struggles are a major stressor for people of all income levels.
How can you make the most of your finances while keeping stress levels down?
Luckily, making a budget can help. You'll get a handle on your finances which will make for easier money matters. Read on to learn what a typical budget looks like, how to create one of your own, and how to stick to it.
The Parts of a Typical Budget
A typical budget is made up of your regular monthly expenses, debt payments, savings, and spending money. A budget helps you plan how to spend your income.
The average budget might include:
- Rent or mortgage payment
- Utilities (like internet, phone bill, electricity, water, sewer, gas)
- Insurance (health, auto, home)
- Debt (loans, credit card bills)
- Savings (emergency funds, retirement)
- Spending money (dining out, clothes, etc.)
Financial experts suggest breaking down your budget in terms of percentages. For example, about 25% of your income should go toward your housing and 10% should cover groceries. Breaking things down by percentages rather than dollars makes it easier to see where you're spending your money.
Keep in mind these percentages are general guidelines. For example, you may have to spend a higher percentage of your budget on rent, depending on the housing market in your area. The key is to strike a balance between essentials, debt payments, savings, and spending money.
What Is the 50-20-30 Budget Rule?
No two household budgets are alike, which is why it's better to compare spending levels in terms of percentages rather than dollars. The 50-20-30 budget rule does just that.
According to the rule, 50% of your income should go toward your needs, 20% toward your savings, and 30% for your wants.
Your needs include things like rent, health insurance, groceries, internet, utilities, and car payments. Savings includes retirement savings, an emergency fund, and money to pay down debt. Wants include non-essentials like vacations, dinners out, and streaming services.
Many financial advisors recommend the 50-20-30 plan because it's a good benchmark for a household budget. These are the percentages you should aim for in your budget. Your finances can change from month to month, so remember these percentages can be flexible.
If your monthly necessities eat up more than half of your budget, it might be time to make a change. You can cut back on your wants like eating less often at restaurants, canceling your streaming services, or skipping happy hour once in a while.
You can also look for ways to save money on essentials. For example, if your rent is the reason you spend more than 50% of your budget on needs, you could get a roommate or downsize your house. You could also get a side gig to boost your income.
How to Create a Budget
The first step to making a budget is to look at your after-tax income. This is the money you have to spend. The goal of your budget is to spend less than you make.
Next, sift through your past account statements to find your recurring expenses. Make a list of how much you spend on expenses like rent, electricity, internet, and insurance. Those costs will always be part of your budget.
Also, note your debt payments for car loans, student loans, and credit card bills.
Once you know your expenses, you can set financial goals. Do you want to pay off your student loans within the next five years? Are you dreaming of living without credit card debt or do you want to start saving for retirement?
Decide on your goals and plan your budget with them in mind. You can use the money you have left after paying for your expenses to put toward your goals. You might also find some ways to save money on your expenses, such as bundling your phone and internet service.
Remember, you can adjust your budget as your priorities change. It's just a tool to help you manage your income.
Tips for Sticking to Your Budget
Once you've made a budget, you might think your work is done. But whether or not you can stick to that budget is the real test. Luckily, there are simple things you can do to keep yourself on track.
Set Attainable GoalsWhen you have something to work toward, you'll feel motivated to stick to your budget. Start with small goals you can achieve.
If you want to save money for a car down payment, start with a goal of saving $20 a week. If you want to pay off debt, you could set a goal to pay off your credit card with the lowest balance in the next three months.
As you set small goals and meet them, it will get easier to stick to your budget because you will have seen the results and you know it's worth it.
Tell Friends and Family About Your BudgetAccountability is also an important factor in following a budget. Tell your family and friends about your new budget and the goal you're working towards. They can offer you support and encourage you to stay on track.
Plus, if your loved ones know about your budget, they'll be less likely to tempt you with offers of happy hour or dinners out. Instead, you can come up with cheaper alternatives.
Treat Yourself Now and Then
If you deprive yourself too much, your strict budget can backfire. You might feel so frustrated with the deprivation that you accidentally splurge on a big-ticket item.
When you hit a budget goal, reward yourself with something small. These rewards will also keep you on track.
Start the Path to Financial Wellness Today
A budget is a key part of financial success. It's a great way to understand where every dollar of your income goes. You can find ways to save money, set financial goals, and live a more stress-free life.
If you're looking for a simple way to start building a budget, try our application. Thinkflow analyzes your earnings and spending to help you make better decisions in the future. Learn how it works and master your money today.