Budgeting is a dirty word for most of us. Not only does it smack of depriving ourselves, but it also is just plain complicated. You estimate what you are going to spend. You have to stay within these estimates, then you have to track your spending and revise those estimates to match what actually happened.
This multistep process is what turns most people off when it comes to budgeting. However, you can’t just stop planning. Having a handle on what you spend is crucial for your fiscal health.
Not spending at all doesn’t work for most. However, if your eyes glaze over at the thought of all those numbers, I’d like to offer a simplified version of budgeting that may help. It is a method of creating a budget for those who are math challenged, or at least budget-motivation challenged. It is based on the numbers 50, 30 and 20.
Start by noting your take-home pay. This is the amount of money you make minus taxes, retirement, health insurance and any other deduction you might have. This is the amount of money you can actually spend. Then figure out the amounts of 50 percent, 30 percent and 20 percent of this number.
Here’s how the budgeting process breaks down:
Fifty percent of your income goes to your needs. This is your house or rent payments, car payments, car insurance, gasoline, utilities, debt and groceries. These are the things you absolutely can’t do without. If your necessities are higher than 50 percent, see if there are ways to save money. Remember that the whole category is 50 percent, so you may choose to spend more on your housing and spend less on your groceries. As long as you spend no more than half of your income on the essentials, you are meeting the guidelines.
Thirty percent of your income goes to wants. This is what you like to spend money on: the cable bill, movies, entertainment, restaurants and travel. These are the fun things that take money out of your pocket. Granted, some of these items may seem more like a necessity than a luxury. For instance, your cellphone bill falls into this category. Whether you have a cellphone may not be negotiable, but the tier of service you have can be changed if needed to save money. Keep close track of this amount in your budget and be sure you don’t let fun creep up past the 30 percent mark.
The final 20 percent goes into savings. This is where you will grow your emergency fund, save for retirement and even save to vanquish your debt. Think of this as your “get ahead” category. Saving at least 20 percent of your income will allow you the money needed to pay down your debt, save for future obligations and reduce your reliance on credit cards.
Though I have listed the categories in descending order, it’s probably a good idea to put the savings category before fun. The better you get at limiting your fun spending, the more opportunity you will have to save.
The whole idea is based on the 50-30-20 breakdown. If this seems to be too austere for you, take a while to look at where your money is going now, then work toward this breakdown. It may take you a while to change your spending habits to match this pattern, but it is a worthy goal to work toward.
Roxie Rodgers Dinstel is associate director of the Cooperative Extension Service, a part of the University of Alaska Fairbanks, working in cooperation with the U.S. Department of Agriculture. Questions or column requests can be e-mailed to her at firstname.lastname@example.org or by calling 907-474-7201.