Personal Finance Budgeting is always a topic where people shy from. Just think of the word “budgeting” makes people shiver, for some, “budget” is the forbidden word.

But…is budgeting your money really so scary?

That is the question I want to find out.

I wanting to know more about how the rich and successful budget their money before they become successful.

For that, I’ve done some research.

Though there are many resources that shows you how to budget money. Most of these resources don’t show how exactly we should do our budgeting. An easy step-by-step guide which anyone can follow.

And I thought:

“How great it will be if there is a Simple Step-By-Step Guide to Budgeting for my Personal Finance.”

In this post, I will show you a smile step-by-step guide detailing how should you create your own budget by the 50/30/20 way.

Lets dive in!

Read Also: Do you need Emergency Fund or Rainy Day Fund & What is the One Fund to Success

What is Budgeting?

Budgeting in personal finance is known as home budget. It is financial planning that assign a future personal income towards expenses, debt repayment and savings. A home budget provides an easily understood breakdown of how much money coming in and how much is going out.

Why is Home Budgeting Important?

Home Budgeting is essential as it allow us to visualize our spending habits. It helps us to visualize the credit card debts that we have collected throughout the years. A good home budget can help us to be free from bad debt and stress free.

When designing our budget, we will look into our past spending, as well as our current income. Using these numbers, we will be able to carefully plan ahead on our home budget.

Creating our own budget is essential for us to prepare for our future and answer questions such as:

  • Should we buy or rent a home?
  • Should we get that new car I am dying for?
  • Should we get the latest smartphone or iPhone?
  • How can we better prepare our 6 year old kids who is going to school next year?
  • Where should we plan for our next vacation? Should we go to some nearby towns, or a luxurious trip to Hawaii?

A good home budget allows us to plan for the nice thing that we always wanted without us going into debt and break our bank.

With the boring stuff out of the way.

Here we will learn to use the 50/30/20 budgeting method, but with a slight twist.

What is a 50/30/20 budget rule?

The 50/30/20 budget rule was commonly used by financial advisor and popularized by Elizabeth Warren in her bestseller book “All Your Worth: The Ultimate Lifetime Money Plan.” Elizabeth Warren co-authored this best seller personal finance book with her daughter, Amelia Warren Tyagi.

The 50/30/20 budget rule focuses on an allocation of your after-tax income on a set percentage on 3 important categories:

3 main categories are:

  1. NEEDS = 50%
  2. WANTS = 30%
  3. SAVINGS = 20%

If you are still wondering how the “50/30/20 budget rule” get its name, it basically refer to the budget allocation of the 3 categories, thus this is how it gets its name.

This simple budgeting rule is best suited for most people who wants a simple and flexible way of maintaining their budget while enjoying the lovely things that life gives.

The best thing about this budgeting method is that, you only need to do one simple task.

Stick to the plan!

Simply following this plan will ensure that you are always moving toward your financial goals.

Of course you can always do a bit of twigging here and there such as increasing the percentage you want to put in your savings and reducing the percentage in spending. By doing so, you can move closer to your goal faster.

The amounts you spend on items in each category can change from time to time as you get promoted, or getting a pay raise.

Read Also: Best Life Changing Books The Successful Are Reading Today

5 Simple Steps to Create A Budget?

In Elizabeth Warren’s personal finance bestseller book, “All Your Worth: The Ultimate Lifetime Money Plan.”

She shows a 6 steps plan to create a budget for life time riches, which is amazingly simple to follow and educational.

But here I will like to make a little twig in the process of creating of a simple Step-By-Step Guide to Budgeting for Financial Success which I find it more straightforward and easy to follow.

I will like to show you the Guide to create a Budget used by the Rich and Successful in 5 simple steps.

Read Also: Surprising Traits of Billionaires Such as Elon Musk and Warren Buffett

Setting Your Goals

Step 1. Define Your Goals

You need to know where you are going before you can think of how to get there. Identifying your goals is the most important of all in planning your budget.

A person who just want to make a living will have a different goals to a person who want to be financially successful.

How should you define your goals?

When defining your goals, be very specific. “I want to be debt free” or “I want to be rich” are not how you should define your goals. It doesn’t really tell much, it sounds like the yearly resolution that we so familiarly promise ourselves year after year for the past 10 years.

When defining your goals always think SMART.

SMART stands for Specific, Measurable, Attainable, Realistic, and Time-bound steps.

Specific

  • Write your goal so it is very clear on what you want to achieve and specific
  • Example: “I want to have money in my savings account to cover any unforeseen emergencies.”

Measurable

  • How much do you actually need?
  • Example: “An saving of $2,000 to cover the repairs of my broken window, and summer class for my 12 year old kid.

Attainable

  • Actionable steps where you will break down your goal into smaller steps to where each step will bring you closer to the goal. 
  • Example:”How much will you need to save each month to get to $2,000?

Realistic

  • When setting goals being realistic makes your journey to achieving your goal much simpler.
  • Example: Saving $500 each month with a $3,000 monthly income is much more achievable than $500 each month with a $1,000 monthly income.

Note: You may want to push yourself bit by bit so you can grow, but not so much that that the goal is simply not achievable.

Time

  • All goals must have an dateline where by this specific date and time you have to achieve your goals. This helps to prevent you from procrastinating like our last year new year resolution. 
  • Example: “I will achieve my goal in 120 days (4 months) from today at 12 noon.”

A good example of a goal is as follow:

“I will have $2,000 in my savings account in 120 days (4 months or 16 weeks) at 12 noon to cover the repairs of my broken window, and summer class for my 12 year old kid by saving $125 dollar per week ($500 each month) with my current income of $3,000 per month”

Remember: To setting successful goals is to focus on what you can control.

Read Also: Surprising Traits of Billionaires Such as Bill Gate and Warren Buffett

Step 2. Know Your Income and Expenses

Have you ever checked your bank account and keep wondering where your money gone to?

Like many others, we have asked this question ourselves too, it is always a mystery.

If UNESCO allows it, it is probably even the ninth wonder of the world.

Jokes aside, when creating a budget, getting to know where your income is coming from and expenses are going to are some of the basic of budgeting.

Getting to know and understand your own income source(s) and your spending habits allows you plan ahead with your income and categories each expenses into needs and wants with the rest in savings.

What are my source(s) of income?

First, you have to list all the different sources of income where your money flow into your bank account each month.

Example of source(s) of income:

  • Salary
  • Dividend
  • Rental income
  • Side business
  • Business

Example of a guy name John Smith:

John only have one source of income which is his daytime job as a car mechanic.

John earns $2,500 per month from his daytime job, and as a responsible citizen he pay his taxes of $500, and receives $2,000 after-tax.

John have a whooping $2,000 per month income flowing into his bank account.

Bottom line: John have a $2,000 take-home salary income.

Where are my expenses?

Secondly, you will list down all the different place where your money is spent, and finally decipher the mystery of where your money gone to from your bank account each month.

We will separate all your expenses into few general categories:

  • Food
  • Shelter
  • Transport
  • Utilities
  • Medical
  • Personal Care
  • Entertainment
  • Savings
  • Donations

Example of a guy name John Smith:

Shelter

  • John lives alone in a condo he rented including utilities fees in the prime district in the CDB area.
  • $800 per month; 40% of his income

Transport

  • He just brought the latest model of Tesla and is financing his car loan
  • $500 per month; 25% of his income

Food

  • John loved to get a cup of $5 latte everyday from his favorite cafe before work and during lunch ($10 per day = $300 per month). And he love to dine out occasionally.
  • $300 per month for the latte; 15% of his income
  • $400 per month for the food; 20% of his income

After calculating and listing down his expenses John found that his total monthly expenses as follow:

  • John spend $800 (shelter) + $500 (transport) + $300 (latte) + $400 (food) = $2,000 per month

With a take home cash of $2,000 and after all expenses, john left $0 for saving after each month.

He realized he need to change and have decided to create a budget plan.

Step 3. Developing Your 50/30/20 plan

Before we can develop our legendary 50/30/20 plan, we need to identify the needs and wants. Before that, lets understand what is a ‘need’ and what is a ‘want’.

Need vs Want

Needs are basic expenses you can’t live without such as

  • Shelter
  • Transportation
  • Food

Needs are items which when you are without it, you cannot survive, while a want is something you can live without but you wish you can have it.

Example:

  • Living with a shelter above your head is a need but living a in luxurious home with a pool is a want.
  • Taking transport to work is a need, but driving the latest model of BMW to work is a want.
  • Having a balance healthy diet is a need but eating out in a fancy restaurant with a glass of 2014 Joseph Phelps Insignia is a want.

Plan Development

Looking at our example of John Smith

Income:

  • $2,500 and $2,000 take home income after-tax

Expenses:

  • $800 per month for the condo locating in prime district; 40% of his income
  • $500 per month for the latest Tesla Model Electric Car; 25% of income
  • $300 per month for the latte every morning and after work; 15% of income
  • $400 per month for the food; 20% of his income

In order for John to create a budget of 50/30/20 he can do one of these 2 methods

  1. Increase income
  2. Reduce expenses
1. Increase income

He can take a part-time job or get promoted at work to increase his income.

Alternatively, he can try one of these few ideas where he can increase his income passively.

Read Also: Best Passive Income Ideas You Can Do Today

2. Reduce Expenses

If you cannot find ways to increase your income, or wish to reach your goal faster. Then you may want to find ways to reduce your current spending so you are able to put some money into savings.

Focus on reducing your wants.

Tips on how to spend less!
  • Buy essential during an offer or discounts
  • Change your cell phone plan
  • Get rid of cable TV
  • Get a roommate
  • Stop going to parties and get wasted, start reading books that will help you to grow
  • Exchange “wants” with friends/family
  • Avoid buying snacks and sugary drinks, as for our fractional character John, “Latte”.
  • Lastly, have the wants once a while after you accomplish each steps of your goals.
How we can help John to reach the 50/30/20 Budgeting Goal:

Income:

  • $2,500 and $2,000 take home income after-tax

Expenses:

  • Shelter: $800 per month for the condo locating in prime district; 40% of his income
  • Transport: $500 per month for the latest Tesla Model Electric Car; 25% of income
  • Latte: $300 per month for the latte every morning and after work; 15% of income
  • Food: $400 per month for the food; 20% of his income

Shelter “Needs and want”

Current: $800 per month on renting the condo in prime district area.

Proposed: Still near to office where he work, if he have rented one slightly further from the city, his rental may just cost him $500 per month.

  • $800 per month to $600 per month = $200 excess
  • This gives you $200 per month saving; 10% of monthly income

Transport “Needs and want”

Current: $500 per month on the latest Tesla Model Electric Car.

Proposed: Still getting a car for the convenience he wanted, if he have brought a car in good condition but not a luxurious car his car loan may just cost him $300 per month.

  • $500 per month to $300 per month = $200 excess
  • This gives you $200 per month saving; 10% of monthly income

Latte “Wants”

Current: $300 per month on Latte alone.

Proposed: Still having to enjoy his favorite drink, he drink 1 less latte a day, he would have saved $5 per day and $150 per month.

  • $300 per month to $150 per month = $150 excess
  • This gives you $150 per month saving; 7.5% of monthly income

Food “Needs”

Current: $400 per month on Food and it seems pretty reasonable

Proposed: No change is required.

  • $400 per month to $400 per month = $0 excess
  • No change

After calculating and listing down his expenses after the expense reduction John found that his total monthly expenses as follow:

  • John spend $600 (shelter) + $300 (transport) + $150 (latte) + $400 (food) = $1,550 per month

With a salary of $2,500 and take home cash of $2,000 after tax, john spent $1,550 per month and have $450 saved per month.

John have successfully allocated and budgeted his home budget to approximately:

  • 50% in Needs
  • 30% In Wants
  • 20% in Savings
Budgeting Plan Development

Step 4. Monitor your progress

Once you have your budget set in place. You can now finally relax and see your bank account increase from a 3-figure to 4-figure to even a 7 or 8-figure.

All great plans only remains great if you stick to it, thus you have to monitor and track your progress on a periodic basis.

Usually you will have to check your progress at least quarterly. And to assist in your goals, there are a number of amazing tools you can use, such as spreadsheets, or third party apps, bank apps, etc.

When choosing these budgeting apps, other than the ease of use, the most important consideration is security.

I will personally consider using a budgeting app developed by the bank as a priority. It is much safer in compared to some other third-party apps.

But if you decide to go with a third party app, make sure they have the following features.

SSL encryption

  • These SSL certificates ensure the contention is encrypted and keep you safe from hackers.

VeriSign

  • Provides firewall protection, and added security, who doesn’t love more security.

Multi-factor authentication

  • At least 2 level of security to ensure all your information are safe.

Step 5. Evaluate & Adjust Your Plan

Periodic Review of your 50/30/20 Budgeting Plan allows you to identify any outliers. You can do adjustment when it is required.

During your evaluation you can ask yourself these following questions:

  • Are you following the 50/30/20 budget plan?
  • When you are adding your monthly expenses, do you notice any unexpected big numbers.
  • Is there and increase in expenses for any of the category?
  • Did you spend much more on food this month?
  • Did you got a pay raise and thus required to do some slight adjustment to the plan?

It’s OK to have wants. But you should always set a limit on how much you can spend on your ‘want’.

If you are planning to go for a vacation by the end of the year, plan ahead and allocate a portion of your income in the “want” category for it.

On the other hand, if you need to ‘borrow’ money for that vacation, maybe it will be better idea to put it off till next year.

Getting yourself into bad debt due to consumer spending is never a good idea for your personal finance.

Most importantly:

Always stick to your plan! 

  • 50% on needs and should always keep it below 50%
  • 30% on wants and should never let it go over 30%
  • 20% on saving and should always aim to increase the amount for savings, because this is where the rich get richer and poor get poorer.

The secret to success is to increase your saving much higher than 20%. The more you save and invest the faster you can reach your goals.

Read Also: Best Investing Books of the Century You Should Read

A Wise man once said

“Future is built for the man or woman who is most prepared.”

Conclusion

The 5 Steps to creating your own 50/30/20 budget is simple, but having the discipline is the most important of all.

  1. Define Your Goals
  2. Know Your Income and Expenses
  3. Developing Your 50/30/20 plan
  4. Monitor Your Progress
  5. Evaluate and Adjust Your Plan

These 5 steps are the keys to financial success and a lifetime of riches.

Question is:

Are you up to the challenge to create your Home Budget and stick to it!

Read Also: Books that will Empower You For the Years to Come

Taking your First Step is always hardest, But it is the Most Important Step to Greatness

Smarter Everyday Library

If you like our post, feel free to subscribe.

Share with your friends on Facebook or Twitter if this help them too.

This will motivate us to write even more amazing articles to help you in building wealth in the future!

Check out our Latest Blog Post Here.

Yes! I want to learn Powerful Wealth Strategy!

Disclaimer: I am not your financial adviser or lawyer, information found in our website are just my opinions. You should always ask your financial adviser or lawyer for any financial or law related advice.

What are your thoughts?

%d bloggers like this: