Finally! The much awaited part 2 of the Money talks series where we discuss spending, saving and investing. As I stated in this previous post, I was a bit hesitant in writing this follow up because a lot of changes to my spending were happening but as it turns out, all the changes did was reinforce how efficient my budgeting plan is and so I decided to share it with you all!
Budgeting is important because it gives you structure. It helps you keep on track, avoid overspending and also keep the focus on the main areas where you need to be financially aware.
If you read the first Money Talks you probably remember me talking about how tracking my spending helped me be more aware of where I was spending my money and if you read that post and are interested in taking better care of your money you probably already did that step (tracking your money) and if you haven’t yet, don’t worry, we’ll go more in dept into it on the next Money Talks where we’ll be specifically discussing spending. After you have an idea of how much money you really need for your expenses it’s time to come up with a budgeting plan to make sure you never spend more than you need to and are still able to enjoy the money you worked so hard for.
As the saying goes, “if you fail to plan, you plan to fail”.
Now, people go about budgeting in many different ways. Some people are good with deciding on spending only X amount of money on necessities and then enjoying the rest or X on necessities and Y for savings or emergencies and then enjoying whatever’s left or even just paying bills first, however much that might amount to and then spending or saving whatever’s left. Now the problem with this is that paying yourself or as I put it before, the money you’re left with to enjoy, is always dependent on how much you spent on necessities. YOU are always left for last and as we all know sometimes there isn’t much left and then you’re left in a constant state of feeling “deprived” because you’re unable to enjoy the money you worked so hard to get.
After a long period of feeling like not having enough, I came across Lynn Richardson and that was a game changer. She encourages instead of allocating money for things, allocating percentages of you total income to each of the main areas of personal finance. I also like her system because it acknowledges the need for savings and emergencies as separate entities which didn’t really make sense the first time I read it but we’ll go into it in a bit.
The system basically consists of separating your total income into blocks of 50 30 10 10 meaning:
- 50% of your total income for necessities
- 30% of your total income for yourself
- 10% of your total income for emergencies
- 10% of your total income for savings
At this point you might have noticed that the word “total” is repeated many times and that’s because it’s really important to understand the importance of it. This means that every bit of money you bring in, no matter how big or small, should be divided into blocks of 50 30 10 10. If you bring in $500 from your job, $50 should go to savings; if your friend pays you back the $10 he borrowed, $1 should go to savings; if you win $25 in the lottery, $2.50 should go into savings and so on.
This system forced me to revisit my spending habits and then really learn how to live within my current means (more on this and on expanding your means in an upcoming post) and to really eliminate anything that is not essential to my life. You’re probably thinking “What if 50% is still not enough to cover my basic needs?”, well, my first response would be to go over your necessities list again because there’s still probably something you can eliminate from it and if after that you feel like it’s still not enough, we’ll discuss ways to increase your income when we address spending.
This system also put ME as a priority, independent of any of the other areas by allocating a fixed 30% of my total income to spend as I please. No judgments, no guilt, this is MY payment for the hard work I put in on making this money. I can spend this entire amount on icecream if I want to or hold on to it until it adds up to whatever amount I need to buy those expensive shoes I want or go out to as many expensive dinners as I please (within that 30% budget). This is what makes it easy to stick to the budget. This is the golden piece. It eliminates or at least greatly reduces the feeling of deprivation I was having before when I was spending without a plan.
The next two parts are also very interesting and make a lot of sense when you think about them because, as we discussed in the previous Money Talks post, emergencies and savings are not and should not be the same thing. For the sake of simplifying here we’ll say that emergencies are those annoying but inevitable things that unexpectedly happen like falling ill and having to go to the doctor or your car breaking down and needing to be fixed or you know, running out of pasta because you entertained more than usual that month and you ran out of pasta. Savings on the other hand are for big things like buying a car or even something smaller like that DSLR camera you’ve been eyeing or just simply (and ideally) money you save for retirement/to live off of in case something extremely unsettling happens like you loosing your source of income or being unable to work for some reason. Savings are there to be your cushion in case you need something to live off of for whatever reason. This also makes sense if you’re a college student like me and might not have a job lined up right after you leave college and your parents are unable to support you or you maybe just not want to rely on them.
Although I personally stand by this particular budgeting system this does not mean it is the only one that works. From my experience it is tried and true, even when my financial situation changes I find that sticking to this system keeps me balanced and less reckless with my money: whether I’m making more or less money I know that my expenses have to be at most 50% of my total income, I’m always paying myself 30% of what I make, there’s always that 10% in case an emergency comes up and most importantly, I’m always saving 10% of my income. A few friends who’ve tried this method have also found it useful or found benefits in sticking to it or at least incorporating bits of it to the methods they use so try it out for 2 or 3 months and see how it works for you. If you like it and would like to keep doing it but feel like something’s missing or something’s not quite working for you feel free to tweak it and adjust it to better fit your life and your needs.
And that’s about it! We’ll be referencing this post a lot in the coming weeks so make sure you bookmark it if you need to. We’ll be going in dept about Spending, Saving and Investing and to which part of this budget they correspond to so stay tuned!
Hope this was helpful and I’ll see you in the next one!
Do you have a budget? How does it work? Do you have a hard time sticking to a budget or creating one that fits your needs? What is the hardest thing about budgeting for you? Questions? Comments? Suggestions? Leave them down bellow!