It is very important to learn to spend less than you earn, most people fall into a pattern of debts when they do not know how to live within their means. Your lifestyle shouldn’t be burning a hole in your pocket, rather your earning should be cushioning your lifestyle.
A realistic monthly budget takes into account your spending habits and gives you a way to curb the excess. Making a budget and living by it doesn’t mean not spending at all, it just makes your spending habits smart and stops you from overspending.
Calculate Your Monthly Expenses and Track Your Spending Patterns
This is important to understand how much comes in and how much goes out – what you spend your money on and how much is it justified. This way you will be able to figure out the problem areas and can work on bringing them under control. Your notes will give you a better understanding of how you typically spend your money each month so you can see how to trim your expenses.
If you know how much money you need to set aside each month for bills, you can then easily divide the remainder between spending money and your savings account – making it a more viable solution than to just go on spending willy-nilly.
Once you have your budget set, it is also important to stick to it. There’s no point in making a budget if you aren’t going to be following it. Consciously make yourself stop from spending money where it isn’t needed. To help you create a logical division in your money you can use the 50/20/30 rule to budget.
Follow the 50/20/30 Budget Rule
The 50/20/30 budget rule is the best place to start if you don’t know anything. The basic rule is to divide after-tax income so that you don’t run out of money. You divide your after-tax money for spending 50% on needs and 30% on wants while allocating 20% to savings.
Your needs will include everything basic that you need to survive like your rent, electricity, gas, groceries, etc. This also stops you from overspending on a lavish lifestyle when you cannot afford it. If your rent and other expenses go over 50% of your salary then you might want to downgrade a bit till you can afford the lifestyle you want.
Your wants will include things that you want but are not essential. These can include holidays, gifts, outings, or any accessory that you might want to buy. We earn so that we can spend on things and experiences that make us happy but they shouldn’t cross the 30% mark from the money we have to live a comfortable life without going into debt.
Your savings will include the money that you can put aside. This should ideally be 20% of your income so that you have a cushion to fall on whenever an emergency crops up like a medical emergency or you losing your job. You can obviously put more aside if you want, but 20% should be your goal.
When you make a realistic and sensible budget, as long as an emergency or unexpected expense does not pop up, your plan will most likely allow you to earn more money than you spend. This is when you can start considering yourself financially responsible.