Budgeting is key for financial success, yet only 32% of people budget and over 50% of adults are living paycheck-to-paycheck. If you want to stop the paycheck-to-paycheck lifestyle, you need to start budgeting properly to fully understand your expenditures every month.
When budgeting, the average person will spend the following percentage of their income on the following:
- 9% on housing
- 17% on transportation
- 5% on food
- 3% on personal insurance
- 8% on healthcare
- 1% on entertainment
- 5% on miscellaneous
- 3% on apparel
- 2% on cash contributions
- 3% on education
Utilize this breakdown to be able to account for your entire budget each month. If you don’t know where to start, try tracking all of your expenditures this month and use this as a guideline on how much you spend.
Ideally, you’ll have the exact expenditures listed and projected expenditures.
If you have $600 allotted for food, this doesn’t mean that you’ll want to spend every last dime that you have on food. In the ideal situation, you’ll spend less than your forecasted amount on non-fixed expenditures.
Gone are the days when a person used a notebook to track their expenses, and Excel is slowly becoming an obsolete option.
“Not long ago, it was a norm to keep track of all your financial dealings in a big old register. As technology improved, registers gave way to computers and Excel files. Anyone wanting to deal with their financial matters would sit in front of a huge file painstakingly reviewing every single financial transaction they had completed,” says Scott Langdon from Money Task Force.
Apps are the new way to start budgeting. Find an app that you like and stick to it.
Once you have all of your projected expenses listed, it’s time to start considering your future and debt.
Savings and Emergency Funds
Experts recommend that you put 20% of your income towards savings, but this is a hard number to reach. A lot of people have no money left at the end of the week, and 20% of your income is a lot to ask.
When this number is suggested, this means:
- Personal savings
You should have both, and personal savings can also include an emergency fund. A lot of financial advisors recommend that you build up an emergency fund, and this is a fund that you do not touch unless an emergency occurs.
These emergencies may include:
- Veterinarian bills
- Engine repairs
- Hot water heater replacement
An emergency fund is a one-off expenditure until the fund needs to be filled up again. Financial experts recommend that you save three months of expenses in your fund. This means that if you need $4,000 a month to live, you’ll want to save $12,000.
Try and max out your 401(k) and retirement accounts, too.
If you can’t afford the 20% contribution, use any leftover money at the end of the month and put it towards your savings and retirement.
Finally, if you have debt, try and pay off your highest, non-mortgage debt as quickly as possible. Start by paying the highest debt and then use the money saved after paying the debt off to pay off additional debt. Over time, you’ll be debt-free and have greater financial freedom to save for retirement, an exotic trip or any other expenditure you wish.