Learn three effective ways to plan a budget and take control of your finances. Start assessing your income, set financial goals, and create a budgeting plan today.
In her book “Girl with Money”, financial literacy consultant Anastasia Veselko explains how to build a smart financial life. In particular, she explains how to start distributing money in a way that avoids debts and loans. We are publishing the chapter “Budget Planning”.
Yes, he is one of those people who do not know how to spend wisely. A good place. A steady income. Enough for both basic needs and luxuries. Not particularly extravagant. And yet the guy is constantly in financial difficulties. Somehow he cannot get anything out of his money. A beautiful apartment – half empty! Always looks like a rag-and-bone man. A new suit – an old hat! A magnificent tie – baggy trousers! Invites you to dinner: crystal – and bad mutton, or Turkish coffee – and a cracked cup! He cannot understand it. The solution is simple: he squanders his income on trifles. I wish I had half! I would show him …
Budgeting is a decision on how to use the money you earn rationally and effectively, how to meet your current needs and at the same time prepare for possible life changes.
We have already discussed that we have poor control over our expenses. It seems that advertising and social networks know better than us what to spend money on. A modern girl would do well to rely on something when she goes to a shopping center or an online store website. And this “something” is a budget. Thought out at home, in a calm environment. This is important for several reasons.
Cut off unnecessary expenses
Imagine: in a sober mind and clear memory, you have calculated a budget for buying cosmetics and decided to stick to it. Then you are not afraid of a temporary clouding of consciousness at the sight of a poster “Three lip glosses for the price of two!” You decisively pass by and buy exactly what you planned. This is a good protection against unnecessary expenses and unnecessary tubes.
Set priorities
Vacation or early mortgage payment? English for the kids or a new coat?.. It’s hard to make the right decision in the moment, especially when a colleague is bragging about a fresh tan. But if you’ve calmly built up a perspective for the coming months in advance, you won’t be confused. I remember being impressed by a colleague’s phrase: “Yes, I’d like to change the car already, but my Excel shows that it’s not time yet.” Level!
I often hear the objection: “But that will deprive me of spontaneity!” I disagree. Running around to friends and borrowing until payday – that’s what lacks spontaneity. But a reasonable plan and a reserve of cash give freedom and ease.
Be creative
Has the amount allocated for restaurants run out by the 20th? No problem, you can invite friends over for dinner. Is your food budget tight? This is a great opportunity to make a menu for the week and finally clear out the cereal and canned goods. You can definitely find a can of beans or a pack of spaghetti. Instead of a movie premiere, watch a TV series at home, and instead of hand cream, use the remains of sunscreen from your vacation.
The principle of prudence
There is a principle of prudence in accounting, and it would be good to use it when planning a personal budget. This is especially useful for those whose income is irregular:
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We only include income that we are most confident in. For example, I don’t know if I will receive a fee for an article this month. Therefore, I don’t include this income in the budget, I don’t count on it.
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But we include all expenses, both guaranteed and those we doubt. I may not be sure whether I will need a visit to the dentist this month, but just in case I keep it in mind and include it in the budget.
By acting this way, we understate income and overstate expenses. We estimate pessimistically or, as they say, conservatively, cautiously. This is a budget that will most likely change, but always for the better. They can pay for the article, and the doctor will not be needed. You are in an unexpected plus – nice!
Choose your budgeting system
I want to emphasize: a budget is not necessarily a detailed Excel file. That’s what scares everyone. A girl imagines how, instead of an interesting TV series or a date, she will have to balance debits with credits and calculate the balances on a calculator. Who wants to deal with that!
I’ll make you happy – you can plan your budget with the level of detail that is comfortable for you. But the level of comfort will have to be determined in practice. It’s just a system, a set of principles. Here they are, in brief:
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The first thing is to put some money into savings.
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The second is to set aside money for necessary expenses.
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Third, you can spend the remaining money as you wish.
The book “The Richest Man in Babylon” describes the simplest system of planning. Which is not surprising: back then, there were no apps, no paper. People kept records on clay tablets (those who could write, of course). A complex system simply would not have caught on, so it looked like this: “I divided it (the money) into parts, according to the plan. I put one tenth aside for myself, seven tenths I distributed with my wife for living expenses. Two tenths I divided between creditors in all fairness, as far as copper coins allowed.”
In other words:
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Put a tenth aside for savings.
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Use two tenths to pay off debts (if any).
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Live on seven tenths of your income.
That’s it. Both peasants and blacksmiths coped with this system and achieved prosperity.
Here are some more similar systems. More complex, as they are modern. Choose which one suits you.
The Six Jug Method
We divide all income into six parts.
55% – current expenses . Everything that is needed from month to month. Food, rent, clothes, rent, transportation, medicine, hairdresser, nanny, etc.
10% – financial freedom . The most important jug. This is money for investment; at their expense your comfortable old age and passive income are gradually formed.
10% – education . Let’s not forget that we are our most important asset, so it’s not a sin to invest in ourselves. Courses, books, trainings, languages, advanced training – everything is included here.
10% — reserve fund . This jug contains a reserve for unforeseen circumstances. And here we also save for large purchases (vacation, car, new iPhone or new teeth).
10% – entertainment . These are dinners in cafes, theater premieres, excursions, music festivals, etc.
5% – charity and gifts . Everything is simple here.
The 20-50-30 Method
This one is simpler — just three parts. This system was invented by Alexa von Tobel, founder of personal finance planning service LearnVest.
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20% – we immediately put aside for investments and savings.
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50% — maximum for mandatory expenses: rent, loans, food, communications, transportation, kindergarten, etc.
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30% – Life Style: restaurants, trips, beautician and everything else – nice, but not necessary.
As income grows, the share of mandatory expenses should decrease. They will take up an ever smaller percentage of the budget. It is known that poor people spend 90% of their income on food, while wealthy people spend no more than 10%.
Method “60–10–10–10–10”
This method is similar to jugs, only the categories are slightly different. It was proposed by financial consultant Richard Jenkins. The method is also called the 60% Solution, because it is recommended to allocate 60% of income to current expenses, and divide the remaining 40% into four equal parts.
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60% – current expenses .
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10% — pension . There are various pension savings programs in the US. We will have to figure out where to invest ourselves. But we will allocate money nonetheless.
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10% – major purchases . Here we save for repairs, a mortgage, a car. We also pay off debts and loans from this part.
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10% – irregular expenses . This is money for any emergency. If you need to fix a car or a tooth, buy a gift for an anniversary. This is probably my favorite “safety cushion”. It is also called financial protection.
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10% – entertainment . Well, everything is clear here.
Jenkins believes that there is no need to keep detailed records of expenses, the main thing is to stay within the magic number of 60%. Then there will be enough for everything else.
In general, any planning system recommends setting aside about half of the budget for current expenses. And be sure to set aside some for savings and investments. And then – you want a vacation, gifts or trainings.
All these rules and systems are there just so you can have something to work from and finally start acting.
What to do with the bonus
Is there any instruction on how to use it correctly? Not only the bonus, but any additional money that is above regular income and that you really want to spend.
How not to
You shouldn’t spontaneously buy expensive things (equipment, clothes, give expensive gifts) – you will regret later that you spent everything in vain.
What’s better?
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If there are debts and loans, allocate part of the money to repay them;
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allocate part for investments and savings, replenish the piggy bank and brokerage account;
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if you don’t have any savings yet, then the bonus can just become the first contribution to your “safety cushion”, it’s easier to start;
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spend part of it on something useful: travel, a sports membership, a massage course, education, repairs, etc.;
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spend 10-20% just like that, on entertainment, fun, pleasure.