Saving money is always on the to-do list. Whether it’s for a big purchase for a rainy day or simply investments and retirement, having some money put aside is usually beneficial, although sometimes it can be hard to get started. Fortunately, being informed and researching ways to create a proper budget can help kickstart the initiative.
With that in mind, this article will give you the basics for budgeting and saving money — from tracking your expenses and understanding where your money goes to creating the budget and cutting costs.
When you want to start a budget, it can be difficult to just begin on the first day of the month. That’s why we recommend keeping track of your expenses for a month or two first to understand where your money goes and how you could properly divide those expenses. Specifically, write down everything you spend money on — from rent or mortgage to your morning coffee. Doing so will give you a clearer idea of how much money you spend and on what.
Create a Budget
Next, it’s time to create the actual budget. First, write down all of your sources of income and the day of the month when you receive that money. Timing is an important aspect of budgeting that is often overlooked, but it’s important to keep in mind when devising your spending and savings plan.
Then, use a budget plan to divide your expenses. The popular 50/30/20 method is great, especially for beginners. Here’s how it works:
Up to 50% of your income should be spent on needs, which includes all housing costs, utilities and food — basically, everything you need to live month to month. If you’re a homeowner, try to plan for a little extra for basic housing costs — you never know if you’ll need money for repairs or maintenance. However, if you’re renting an apartment, ensure the rental costs are no more than 30% of your income.
The best way to reduce the amount of money you spend on your needs is to reconsider your housing situation. For example, if you want to buy a house, consider a less expensive market, such as homes for sale in Detroit. Or, as a renter in a big city like Dallas, look for smaller rental apartments or those that are located further from the downtown area.
As remote work becomes increasingly present in our lives, it’s easier than ever to move to a new place. But, renting a smaller apartment doesn’t mean you should have to live in a cluttered home, so you’ll need to do some planning and organizing beforehand. For instance, keep only the essentials in your home and put the belongings that you use less frequently into self-storage, which has become quite inexpensive these days.
The next category to budget for is wants, which should account for about 30% of your total after-tax income. This category will include the items you need to be comfortable, and it will also prevent you from going on a spending spree if you’re not used to living frugally. In particular, entertainment spending — such as subscriptions, take-out food, a gym membership and so on — are all part of this category. Of course, you can always cut down on these expenses even more, but this is a safe percentage to keep to yourself, especially if you’re just getting started.
According to this model, 20% of your income should go directly into savings. How you choose to save depends on what you want to achieve with this money. For example, you can set up an automatic transfer to build up your retirement account, or you can redirect that money into a savings account. If you choose the latter, be careful about which type of savings account you choose. There are many options out there, so research them all thoroughly and choose one with a high interest rate.
Another way to save money is to invest it and generate another string of passive income. If you choose this route, we recommend that you do so only after you’ve established an emergency fund that covers a few months’ worth of living expenses. That way, you’ll know you are safe before deciding to invest. Once again, there are many options available — from index funds to individual stocks — so do your research and select whatever you think will yield the most money for the amount of effort you want to invest.
There are many ways to divide your budget, but this model is easy to follow and simple to understand. Then, after you have a few months under your belt, determine which expenses are no longer sensible and start changing your habits to have more money in the savings category at the end of the month.