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If you’re looking to build wealth, it doesn’t matter how much money you’re making.
What matters is what you do with your money once it comes in. Being intentional with your money is what will ensure your long-term prosperity. A key part of taking control of your spending is directing it’s flow, and making sure you’re spending it in a way that aligns with your values.
By creating and following a simple budget, you’re ensuring you’re aware of the flow of money, and directing it as you see fit.
This article is going to show you how to implement a simple budget for beginners that involves:
- Understanding your baseline survival expenses
- Deciding how much you want to save
- Observing the rest
That’s all it takes. This method will ensure that you’re taking care of your survival needs, and hitting your savings goals. After that, what you do with your money is up to you.
Pre-Work – Track Your Spending
Now before you lay out a budget, it’s helpful to have done some work to track your spending. That way you have a baseline of what’s coming in, what’s going out, and where it’s all going.
Once you’ve done that, it’s a lot easier to understand:
- What is my average income?
- What am I spending money on now?
- Of that money, what is a need vs. a want?
By doing this pre-work, the simple budget method becomes a lot easier.
Using the 50/30/20 Rule to Get A Baseline
The 50/30/20 rule was popularized by Elizabeth Warren in her book All your Worth: The Ultimate Lifetime Money Plan, an provides a great starting point for your budget.
The 50/30/20 rules essentially lays out that of your after-tax income:
- No more than 50% should go to needs
- At least 20% should go to savings
- The remainder (30%) can go towards wants
This lays out a good framework for guiding you on how much to allocate across the three categories. Let’s imagine you are bringing home $4,000 after tax every month. That means that:
- No more than $2,000 should be spent on needs
- At least $800 should be saved
- The remainder ($1,200) can be spent on whatever you want
Let’s keep this in mind as we go through the three steps.
Simple Budget Step 1: Start by Laying Out Your Living Expenses
At the very least, your simple budget should include all the things you’re purchasing to stay alive.
This includes housing, groceries, and non-negotiables such as insurance, internet, minimum debt payments, etc. There are all things that cannot be easily eliminated from your spending.
Now notice how this list of living expenses is very limited – truly what you need to survive. There is a lot of things that we deem as “needs,” but in reality we could live without them. This includes things like clothing, subscription services, eating out, household decorations, etc.. These things are great, and support your lifestyle, but if push comes to shove, you could survive without these things. Your true living expenses are typically non-negotiable, so we want to make sure you’re categorizing these correctly. If you’re categorizing a large portion of what you spend on a monthly basis as needs, it becomes very difficult to redirect the flow of money.
Your living expenses form the foundation of your budget, and all your subsequent budgetting decions are made after your needs are taken care of. Imagine you lost your job and had no income, and all of a sudden you needed to completely cut back until you created a new income source. The things that would still remain represent your true living expenses.
So the first step in creating a simple budget is getting an understanding of what are the basic, non-negotiable items that you need to purchase monthly.
Be cutthroat in making this list – it will make the following steps much easier.
Do your Living Expenses Exceed 50% of Your Income?
After laying out your living expenses, tally them up and compare them to your monthly after-tax income – it should be less than half of your take-home.
If your living expenses are greater than 50%, you may need to make some adjustments to your lifestyle. Spending more than 50% of your income on just surviving makes it difficult to save and live your life. Adjustments to reduce your lifestyle could include moving to a cheaper home, downgrading the vehicle you’re driving, being more cost conscious when purchasing groceries, etc. These changes don’t happen fast, but they’re important. By exceeding that 50% figure, you can severely hamper your financial life in other ways.
If you’re not within this 50% figure, make a plan to get there in the next few months – your future self will thank you.
Simple Budget Simple Budget Step 2: Decide How Much You Want to Save
After your needs are take care of, you need to decide how much of your income you want to save.
Notice how after taking care of your survival, this comes next. Savings come before discretionary spending, and this should be a habit that carries through every time you get paid.
You need to make a decision as to how much you’re going to save. According to the 50/30/20 rule, you should save at least 20%, but I would encourage you to do more if possible. Now depending on your income, 20% may not result in much, but I would urge you to protect that 20% slice of savings with your life. Setting aside and prioritizing savings will ensure your future financial health. Putting this money aside for your future self is key for building wealth.
Savings basically represent paying your future self, with growth. Make sure you’re putting your savings to work, not letting it sit idle, but rather putting it to work by investing. Building a habit of saving will set you up for years to come.
Now take a minute, decide what percentage of your income you want to save, and automate the savings of that amount.
Step 3: Observing the Rest
Once savings and survival are taken care of, you can spend the remainder on whatever you want.
What’s important to note here though is you need to be thoughtful and aware of where your money is going. Make sure that you spend the money on things that you value.
By spending on what is important to you and what brings you joy, it reinforces the feeling of having enough. If you start just spending however those around you are spending, you will end the month with nothing to show for. This then brings on the temptation of dipping into your savings to purchase things you want. You need to be conscious of where your money is going, and make sure you are directing it. Spend your money on the things that bring you happiness.
By observing the flow of your discretionary spending, you can recognize what brings you joy, and make sure you’re spending on what’s important. This remaining 30% is your money to spend how you want, make sure you’re making the best use of it. Otherwise, you will never feel like you have enough.
By tracking your spending, you can observe, reflect, and adjust to ensure you’re making the most of your money.
Go and Make Your Simple Budget
Now that you have the three steps, go and make your simple budget! All it takes is
- Laying out your living expenses
- Deciding how much you want to save, and
- Paying attention to how you’re spending the rest
You can further categorize each step by allocating funds to different spending categories, but for a simple beginner budget that’s really not necessary. What’s important is having enough to live, saving for the future, and taking control of the rest.
Financial control is key for a strong financial future, and your future self will thank you for taking this step.