A few weeks ago, I touched on the subject of budgeting. After which, I had several people ask me about what a typical budget should look like. While every person’s situation is unique, and what you value may be very different from what I value, there are enough universal strategies and best practices that I can share to hopefully help some of you either get started on a personal budget or use as measuring stick to see if your current budget needs adjusting.
For many, the idea of even starting a budget can be overwhelming because money is spent in so many different ways and for so many different purposes. That’s why when I am advising a person on what their budget should look like I subscribe to the KISS methodology. (Keep It Simple Stupid)
Famed author and financial advisor Ron Blue argues there really are only four things you can do with money, Live, Give Owe or Grow it. I really like this simple perspective because when you really think about it I think he’s right. There are millions of individual things you can do with your resources, but they all really fall into one of these categories. So when first developing a budget, if you can stick to the parameters you create for each these broad categories you can have a successful budget. However, what is a reasonable amount for these different uses of money? Today I thought I would share some my thoughts on this. I subscribe to the 50/20/20/10 model of budgeting.
In this type of budget 50% of what you bring home each month should go towards basic necessities. Things like shelter, food, transportation, or utilities all fall in this category. These are the things you need to have to survive. The next 20% is allocated to things you simply want to have to make life more pleasurable. These can be things like eating out, new clothes, entertainment, and the like. Third, is 20% for saving and debt repayment. Depending on your personal situation this might all go towards savings, might all go towards debt payment or some combination of both. Being someone who hates debt with a passion my personal preference is to put the full 20% towards eliminating those debts until they are gone. Others may choose to put a portion to debt repayment and another portion to saving for kid’s college or retirement. Both are acceptable plans. Last, but certainly not least as a believer I am called to give 10% back to the church. Regardless of your faith, I believe 10% of your monthly income being allocated to non-profit organizations you support is important. Without a heart of giving, I have found most people never have enough money to satisfy their other wants and desires. Giving helps produce that contented and generous spirit.
Whether you have been budgeting for years, or just looking to get control of your spending, I would suggest you take last month’s bank statement and run it through this very simple allocation. Tag every dollar that was spent as one of these four categories. And then see how much is being spent on each. If you’re honest, I would guess too much is being spent on the wants and the needs, and too little on saving and giving. Unfortunately, too often it is the want category that is most out of line with where it should be. If you find too much month still remains when the money runs out, this want category is also the category that must be reduced, in my opinion, to bring the whole budget into balance.
In the end though having some basic rules in place for where your money will go before you even receive it can be a rather freeing and calming experience. It can allow you to have the peace of mind knowing that you are being intentional with what you have and if stuck to, will likely lead to even more financial freedom in the future
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations)