The Secret to a Simple but Powerful Budget

These days, having a budget is not only financially smart but trendy too. In fact, 55% of Americans report using a budget on a regular basis. 

And the benefits are numerous — control over your money, progress toward your chosen financial goals, dedicated savings for emergencies, reduction in debt, plans for retirement, and peace of mind. 

Some people choose to delve into the nitty-gritty of their finances. But the truth is that you can budget successfully in just minutes a month. You can set up a powerful budget and start tracking your progress today. Here’s how: 

Start with a simple but effective budget. 

Especially if you’re a beginning budgeter, the thought of creating a detailed financial plan can be overwhelming. Instead, consider drafting a budget that’s entirely unintimidating. The 50/30/20 budget simplifies your money by splitting it into just three foundational categories. 

Use your monthly after-tax income as the starting point for this budget framework: 

  1. Look at your paystubs for the month and copy down the total amount you actually pocketed. You’ll usually see it referenced as “net pay” on your paystub. 

  1. Now scan the deductions — the amounts that were subtracted from your gross pay to produce your net pay. You might see money taken out for federal taxes, state taxes, health insurance, retirement contributions, and more. 

  1. Ignore the tax deductions and add everything else back to your net pay. So, let’s say your net pay is $4000. If your employer deducts taxes, $50 for health insurance, and $240 for your 401(k) contribution, you’ll calculate $4000 + $50 + $240 = $4290. 

  1. Finally, subtract any tax payments that you make after receiving your paycheck. For instance, if you pay estimated federal taxes of $125 and property taxes of $385 from your bank account each month, you’ll calculate $4290 - $125 - $385 = $3780. 

The number you calculate is your monthly take-home pay and the starting point for the 50/30/20 budget: 

50% for needs 

Plan to put roughly 50% of your monthly take-home pay toward your household’s true needs: 

  • Housing (mortgage, rent, necessary home maintenance) 

  • Essential utilities (electric, gas, water, garbage, possibly Internet and phone) 

  • Basic clothing 

  • Groceries 

  • Transportation (car payments, gas, registration, parking, tolls, maintenance) 

  • Insurance (homeowner’s, health, dental, vision, life, disability, long-term care, etc.) 

  • Education and childcare costs 

  • Medical costs 

  • Minimum payments for all your credit lines and loans 

30% for wants 

Plan to put, at most, 30% of your monthly take-home pay toward non-essentials: 

  • Dining out 

  • Luxury clothing 

  • Cable and streaming services 

  • Home improvements 

  • Home décor 

  • Toys 

  • Gifts 

  • Travel 

  • Entertainment 

  • Hobbies and extra-curricular activities 

  • Charitable contributions 

20% for savings and debt repayment 

Finally, plan to put 20% of your monthly take-home pay toward savings of all kinds and accelerated debt repayment: 

  • Emergency fund 

  • Sinking funds 

  • Retirement (401(k) plan, IRA, etc.) 

  • Educational savings (529 plan, Coverdell ESA, etc.) 

Going back to our example, suppose your monthly take-home pay is $3780. Using the 50/30/20 budget, you should plan to spend about $1890 on your needs and $1134 on your wants, while allocating $756 for savings and debt. 

Keep in mind that this is just a guideline. Once you crunch your own numbers, you may choose to adjust your percentages to fit your family’s circumstances. 

Harness the power of automation. 

Setting up a budget doesn’t have to take a lot of time, and neither does staying on top of your finances. With a simple, one-time setup, you can use modern technology to do some of the work for you. 

Automation easily saves you time and the hassle of repeated tasks. Plus, delegating control to a computer can prevent costly human mistakes and make it more likely you’ll stick to your budget. 

Consider automating these areas of your finances: 

  1. Direct deposit: Skip the manual paycheck deposit, and ask your employer to transfer the cash directly to your bank account each pay period. 

  1. Automatic bill payment: Most banks and credit unions let you set up several recurring bill payments. Or authorize the businesses you use (utility companies, streaming services, lenders, etc.) to deduct the necessary cash from your checking account. 

  1. Automatic investment: Give your employer the go-ahead to deduct 401(k) contributions directly from your paycheck. You’ll build future wealth every time you get paid. 

  1. Automatic bank transfers: Looking to enhance your emergency fund or save for a special goal? Create a separate savings account and use automatic bank transfers to move money periodically into that account. 

Track your progress. 

Once you make your budget, you’ll want to keep tabs on how you’re doing. That way, you’ll know if you’re close to hitting your spending cap for the month . . . or whether you’ve got some extra cash to enjoy! 

Go analog if that’s your style. Grab a notebook and pencil to keep tabs on your spending plan. Just write down what money comes in, what money goes out, and which bucket that spending belongs in. 

If you do most of your spending via credit card, your card may actually do the work for you. Many companies automatically categorize your transactions (food, entertainment, clothing, etc.). So you can simply view your monthly statement to see how your spending tracks against your budget.  

A third option is to take advantage of a dedicated budgeting app. If you like having your financial details at your fingertips, an app like Mint, YNAB, or PocketGuard might be right for you. The app keeps tabs on your money in real time and lets you see at a glance how your actual spending aligns with your plan. 

Create a financial habit. 

Once you’ve got your budget created and your tracking system in place, you’re on your way! Now, with just a bit of maintenance, you can easily stay on top of your finances and adjust as needed. 

Plan to set aside a small amount of time each week for a few important financial tasks: 

  • Check your spending: Review your budget tracker, so you know where you stand and can plan for the week ahead. 

  • Pay bills: Your automated bills will take care of themselves, but be sure to handle any other bills on your plate. 

  • File important paperwork: Tuck away any tax documents, receipts, or financial statements you’ll need to keep. 

  • Work on a long-term goal: Make progress on an action item from your financial to-do list. Maybe that’s opening a retirement account, researching mortgage lenders, applying for life insurance, or learning about college savings plans. 

Don’t forget: Once a year — or whenever life circumstances change — give your budget a thorough review. You’ll want to ensure the plan you have still fits your current needs and make adjustments where necessary. 

Building a strong financial plan doesn’t require a major time commitment. With your 50/30/20 budget in place, you can easily automate and track your progress. So you’ll quickly be on your way to achieving your biggest financial dreams. 

 

The material presented here is for informational purposes only and does not represent specific financial advice to you or your circumstances personally.