The right way to approach a budget

It is surprising how many people have no idea how to budget. Yet it shouldn’t be a surprise as it is not taught in most schools and the majority of people have to learn the hard way. Follow our guidance and you will be on the right path budget-wise to ensure you are saving the right amount of money and preparing properly for the future.

Most people start out with a low paying job. This is just enough to keep them alive while they study or wait for a better opportunity. Understandably these people spend 90% to 100% of their wages every week. They save almost nothing. Then a new job comes along and they are shocked by how much money they have. So they spend more. Some weeks they don’t even have anything they can think to spend on so they are saving maybe 20% on the occasional week and they are patting themselves on the back for this achievement. If this sounds like you, you are going about it the wrong way.

The most common approach to budgeting that is taught by many financial advisors is the 50-30-20 rule. It is incredibly simple. You don’t need to study to understand it and you certainly don’t need to pay someone hundreds of dollars to try it out. Quite simply you spend 50% of your earnings on your weekly expenses. This means your bills, your food, everything you spend on in a week. If you want a milkshake on Friday, that comes out of this 50%. Then you put 30% into your long term savings. This could be saving for a car, saving for a house, saving for retirement, etc. What this 30% goes towards depends on your stage in life and what you are aiming for. Finally, you have 20% leftover and this 20% is to have fun with. You shouldn’t spend this 20% every week, most of it should go into a separate ‘fun’ account so that you can let it accumulate and do weekends away, buy nice things, treat yourself, etc. Of course, if there is something you want in that week you can do that too.

This means that you are saving 30% of your wages every week for your long term. 20% may or may not be saved but it will likely be spent in the short to medium term anyway. 50% can go on expenses. This simple rule will allow you to work out what kind of house you can afford, what kind of car repayments you can manage. If you are about to sign a mortgage and are working it out that it will mean you are spending 95% of your wages, you may think “ah it just worked out, great”. In actual fact, this type of spending will get you in trouble once an unforeseen expense arises. The moment your washing machine breaks, you will be in financial peril.
This means you need to be disciplined with your spending. If you are only allowed to spend 50% on bills you may have to cut some things out that you quite enjoy. You may think Netflix is great value but when you look at your finances you now know you just can’t afford it.

The great thing about online banking today is that it will allow you to divide your incoming salary into these three accounts automatically. This will make it easy to be disciplined and to stick to the rules. In addition, you could make smaller subcategories out of each one. Perhaps you want 15% to go towards retirement while 15% to go towards a new car. This is all easy to do and if you start with the right mindset you will be saving in no time.

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