2. The 50/30/20 rule
Another budgeting technique is the 50/30/20 rule. It involves dividing your monthly income into three buckets:
- 50% (or less) goes to necessities such as housing, student loans, and utilities. These are expenses you have to pay every month.
- 30% (or less) goes to nice-to-haves, such as entertainment, hobbies, and travel.
- 20% (or more, if possible) goes toward savings and paying down debt.
You can adjust the 50/30/20 rule based on your short- and long-term goals, but be careful about confusing nice-to-haves for necessities. Several dinners out each week and unlimited data plans may be nice to have, but they aren't essential.
3. Track expenses
A third method for helping you organize and manage your spending is monthly expense tracking. It takes the most time, but it provides the greatest insight into your spending habits.
Use a spreadsheet, an online service or a notebook and pen.
First, create columns for your spending categories (e.g., groceries, gas, utilities, medical, entertainment, and child care). Add categories for miscellaneous/unexpected and for savings.
Next, divide your monthly income among the categories and then pay your bills and save accordingly. It's important to list all items and subtract the amount you spend in each category, so you know where your money is going. Once a category is out of money:
Stop spending in that category if possible, until you get your next paycheck.
Then consider making trade-offs by moving money around from other categories.
You can stretch your money in many directions. What you earn has to pay for daily expenses, entertainment, life events, and long-term goals. Budgeting can help ensure you’re covering the necessary monthly expenses while you save for the future. And hopefully, you'll have some extra cash to reward yourself for your good work.