I define myself as a finance nerd way because of my eagerness to learn, study, and implement personal finance tips on saving and budgeting. ((One of my favorite tips is explained in this YouTube video by Ramit Sethi—probably one of the most helpful things you’ll ever watch.))
I’d like to explain how make a simple—and extremely effective—budget. When people hear “budget,” they often think of spreadsheets, checkbooks, and loud calculators that print on small spools of paper.
But a budget can be simple: it’s called the 50/30/20 method. Let me show you how I used it to teach myself to spend less than I earn, which, after all, is the core concept to being financially successful.
FIRST: I calculated how much money I make a month. On my last job, I worked as a freelance production assistant, which meant that each week I’d bring home a different amount of money. Most weeks it’d be around $600/week; other weeks it’d be closer to $800.
NEXT: I averaged my paychecks to get my monthly income: $2,550.
FINALLY: I created three simple budget categories: NEEDS, WANTS, and SAVINGS, with 50%, 30%, and 20% of my income going to those categories, respectively.
- 50% = NEEDS: This is how much of your monthly income should go toward needs. Needs are anything that you have to pay for: rent, utilities, health insurance, student loans, groceries, and gas. That was my list.
- 30% = WANTS: This is everything that you want to buy: clothes, movie tickets, music from iTunes, apps for your phone, going out to eat with friends, etc. Anything that you don’t NEED goes under the WANTS category.
- 20% = SAVINGS: Save 20% of all your income each month. It’s as simple as that. I have my ING Direct Savings account debit my checking at the beginning of each month. I treat it as a bill, really. And because of this, I have a good amount of money saved for unemployment stints, emergency car repairs or medical bills, as well as larger purchases such as vacations or new computers.
Based on those totals, I should be spending the following each month:
- NEEDS: $1,275
- WANTS: $765
- SAVINGS: $510
The 50/30/20 split is a great and simple place to start, but it might not work perfectly for everyone. For example, my monthly NEEDS were $1,450—more than the 50% I’m supposed to allow. In order to compensate, I adjusted my NEEDS $1,450. Also, while $510 is a fantastic amount to put into SAVINGS, I wanted to save more. So I decided on an amount that made sense to me, and whatever was leftover I’d spend on WANTS each month. Here were my actual numbers:
- NEEDS: $1,450
- WANTS: $455
- SAVINGS: $645
If you have to take money away from any category, make sure it’s WANTS. You can’t take money from NEEDS because you have to pay for those things, and you certainly don’t want to take money away from your SAVINGS.
Mint.com, with a bit of training, automatically categorizes every purchase I make into those three categories. This not only makes the budgeting process easy, but it’s extremely helpful, and actually fun, to see where my money is going.