Creating a budget can be a daunting task for beginners, but it is the most important step in becoming financially responsible. Whether you’re a beginner or not, following a budget will help you manage your money better and achieve your financial goals.

“But how to create a monthly budget plan the right way?”

Here I’ve created an easy beginner’s guide to creating a monthly budget using the popular 50/30/20 budget rule. But unlike the traditional 50/30/20 budgeting rule, I’ve added in a little surprise where you can accelerate your savings and create financial freedom for you and your family.

I call this the “Agile 50/30/20 Budgeting Plan

Antony.C, founder of incomebuddies.

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

What Is The 50/30/20 Budget Strategy?

The 50/30/20 budget strategy (i.e. 50/30/20 budget rule) is based on the idea that you should spend 50% of your income on necessities, 30% on discretionary expenses, and 20% on fun and pleasure. The 50/30/20 budget strategy is a simple yet effective way to save money, and live within your means while still having a comfortable lifestyle without feeling like you are sacrificing anything.

Often financial advisors will use this simple budgeting strategy to help their clients in creating a saving plan to help them in achieving their goals as the 50/30/20 budgeting strategy is one of the simplest budgeting strategies that is easy to understand and even easier to follow.

History of the 50/30/20 budget strategy

Elizabeth Warren popularized the “50/30/20 budget strategy”, in her bestseller book “All Your Worth: The Ultimate Lifetime Money Plan”. Elizabeth Warren co-authored this best-selling personal finance book with her daughter, Amelia Warren Tyagi.

In her book, she shows a 6 steps plan to create a budget for lifetime riches, which is amazingly simple to follow. The 50/30/20 budget rule focuses on an allocation of your after-tax income on a set percentage.

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

But here I will like to make a little upgrade to the process of creating an even simpler budgeting plan, a step at a time that is straightforward, easy to follow, and accelerate your ability to save.

How to Create a Monthly Budget for Beginners

If you’re just starting out on your own financial journey, it can be tough to know where to start. Luckily, there are plenty of resources available to help you develop a budget.

In this article, we’ll show you how to create a monthly budget for beginners using a few simple steps and some basic maths.

This will be a step-by-step guide to creating your own personal budget so you can be in control of your finance with the improved “50/30/20 budget strategy”.

“Agile 50/30/20 Budgeting Plan”.

Antony C., founder of incomebuddies.com

The “Agile 50/30/20 Budgeting Plan” will allow you to accelerate your ability to save by making 2 changes.

  1. Increase the percentage of savings in a constantly changing environment.
  2. Reduce the percentage of spending while keeping your current lifestyle.

By following these steps, you’ll be on your way to better understanding your spending habits and creating a personal monthly budget that works for you.

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

Step 1. Define Your Goals

When creating a budget it is important to know what your goals are for the budget. Without knowing your goals, it’s difficult to create a budget that will help you reach them. Defining your goals will help you create a realistic budget that meets your needs and helps you stay on track.

A budgeting plan created by a person who wants a home budget to monitor their finance can be very different from a budgeting plan created by a person who wants to be financially free.

How should you define your goals?

Setting and achieving goals is one of the most important things you can do to achieve success.

  • What are your goals?
  • What are the steps necessary to achieve them?
  • How do you measure progress towards your goals?
  • What will happen if you don’t achieve your goal?

The answer to all of these questions is important in determining how successful you will be.

When defining your goals, be very specific.

You should not set vague goals such as, “I want to be debt-free” or “I want to be rich”. Vague goals are the main reason that people are unable to meet their goals.

A vague goal is the main reason why most people end up failing to achieve what they want, just like the yearly resolution that 90% of us fail to achieve.

Use the SMART methodology to define your Goals

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

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

Time

  • All goals must have a due date. This has to be the date and/or time you have to achieve your goals. This helps to prevent you from procrastinating.
  • Example: I will achieve my goal in 120 days (4 months) from today at 12 noon.

A good example of a goal is as follows:

“I will have $2,000 in my savings account in 120 days 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: Setting successful goals are set on things that you can control.

Other alternative goal-setting methods to setting SMART goals are FAST goals, CLEAR goals, and PACT goals. HQHire has some in-depth articles on each of them.

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

Step 2. Know Your Income and Expenses

There’s no question that knowing your income and expenses is key to staying within your budget.

In fact, without this information, it’s tough to know where to start when trying to save money. By understanding your financial situation, you can create a plan and track your progress so you can stay on track.

“Have you ever checked your bank account and keep wondering where is all your money?”

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

If UNESCO allows it, the “mystery of the disappearing money” is probably the ninth wonder of the world.

Jokes aside, when creating a budget, you will get to understand the flow of your money.

A budget allows you to know where your income comes from, and where are all your expenses.

Getting to know and understand your own income source(s) and your spending habits allows you to plan ahead.

You can allocate your income into different categories, some into needs, some into wants, and the rest into savings.

What are the different sources of income?

The most common source of income for most households is earned income, but there are many different sources of income.

In fact, the wealth usually will have more than 1 source of income.

Here are the most common 7 streams of income.

  • Earned income: This is your day job and the most common source of income, which is also known as salary income.
  • Profit income: This is the income you earn through business.
  • Interest income: This is the income you earn through the lending of your money to others or organizations for a certain amount of interest paid to you over a period of time.
  • Dividend income:  This is the money that you’ve earned through the distribution of dividends from the stocks you own.
  • Capital gain income: This is the money you get from the appreciation (increase in value) of investment through the selling of stocks or businesses.
  • Rental income: This is the money you get by renting out an asset such as your property, room, or car.
  • Royalties Income: This is the money you’ll get by allowing others to use your original products, ideas, content, design, or process in return for a payment.

Example of a guy named John Smith:

John only has 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 pays his taxes of $500 and receives $2,000 after-tax.

John has a whopping $2,000 per month income flowing into his bank account.

Source of Income: Earned Income with a $2,000 take-home salary.

Where are my expenses?

Expenses are any form of outflow of money, that you’ve spent on either your needs or your wants. Simply list down all the different places where your money is spent, and this will help to decipher the mystery of where your money goes each month.

We will separate all your expenses into a few general categories:

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

Example of a guy named John Smith:

Shelter

  • John lives alone in a condo he rented including utility 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 every day from his favorite cafe before work and during lunch ($10 per day = $300 per month). And he loves 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 were as follows:

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

With 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 decided to create a budget plan.

Step 3. Developing Your 50/30/20 Personal Monthly Saving Plan

Developing your 50/30/20 personal monthly saving plan will require you to correctly identify your list of “needs” and “wants”. This will help to create a budget strategy that allows you to save money while still having a comfortable lifestyle without feeling like you are sacrificing anything.

Improved version of the 50/30/20 personal monthly saving plan to the agile 50/30/20 budgeting plan will be shown in step 5 below, but now let’s understand what are ‘needs’ and what are ‘wants’ and the steps needed to create a traditional 50/30/20 personal monthly saving plan.

Difference between needs and wants

Needs are basic expenses that you cannot live without, things you need to spend to meet the basic necessity to survive, such as food, water, and shelter. Wants are the desire for goods and services that you would like to have but do not need.

Needs vs wants examples

  • Living with a shelter above your head is a need, but living in a 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 balanced healthy diet is a need, but eating out in a fancy restaurant with a glass of 2014 Joseph Phelps Insignia is a want.

Creating a 50/30/20 Personal Monthly Saving Plan

  • Identify the income you have after-tax.
  • Divide your income into 3 different buckets; the needs (50%), the wants (30%), and savings (20%).
  • Make changes in your life so that you can save at least 20% of your income.

Make changes to your spending habits to reach the 50/30/20 budgeting plan.

Achieving the 50/30/20 budgeting plan can be done in 2 different ways.

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

An increase in income can be done by increasing the sources of your income, or by increasing the value of how much you can earn per hour of work.

  • Investing in dividend-paying stocks
  • Creating a side-hustle
  • Taking up a part-time job
  • Getting a pay raise at work
  • Getting a promotion at work

Alternatively, you can create a passive income using some of these passive income ideas that can be done by almost anyone.

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.

When you are reducing your expenses, you may want to focus on reducing how much you spend on 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 getting 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 in a while after you accomplish each step of your goals.

Example on creating a monthly budget?

The best way to understand the process of creating a budget is probably by using examples. And here we have John (fictional character) who wants to create a personal monthly budget.

Let’s use John Smith to illustrate how he creates a monthly budget.

Income:

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

Expenses:

  • $800 per month for the condo located in the 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
Shelter “Needs and Wants”

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

Proposed: Still near to the office where he works, if he has 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 the monthly income
Transport “Needs and Wants”

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

Proposed: Still getting a car for the convenience he wanted, if he has 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 the monthly income
Latte “Wants”

Current: $300 per month on Latte alone.

Proposed: Still having to enjoy his favorite drink, he drinks 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 the 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 has successfully allocated and budgeted his home budget to approximately:

  • 50% in Needs
  • 30% In Wants
  • 20% in Savings

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 a 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.

Check your progress quarterly.

You can use budgeting apps, spreadsheets, bank apps, etc. to aid in your journey to reaching your financial goals.

When choosing these budgeting apps, there are a few factors to consider.

  • Ease of use
  • Category range
  • Budgeting tips
  • Goal setting strategy
  • Security

I will personally choose to use a budgeting app developed by the bank. As money is considered sensitive information, I find it more comfortable to use apps developed by banks compared to third-party budgeting 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 levels of security to ensure all your information are safe.

Step 5. Evaluate & Adjust Your Plan

The last step in creating a budget is to perform a periodic review of your 50/30/20 Budgeting Plan and make it agile, adjusting each of the allocations according to your personal life.

This is the important step where it makes your budgeting plan agile and gives it the ability to adapt to the constant changes so that it can help you meet your saving goals faster and easier.

Evaluation and adjusting your plan allows you to identify any outliers and gives you an opportunity to do any adjustments to the budget plan when it is required.

  • 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 the poor get poorer.

As your pay raises and you get promoted in your job your income increases, this leads to an excess of income where you can properly allocate it into one of the 3 buckets.

During your evaluation you can ask yourself the following questions:

  • Are you following the 50/30/20 budgeting plan?
  • When you are adding your monthly expenses, do you notice any unexpected big numbers?
  • Is there an increase in expenses for any of the categories?
  • Did you spend more on food this month?
  • Did you get a pay raise and do you need to do some adjustments to your budget allocation?

It’s OK to have wanted. 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 a 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.

Creating The “Agile 50/30/20 Budgeting Plan”

Agile 50/30/20 budgeting plan is a budgeting plan where it accelarates the percentage allocated to your savings as your income increases.

Antony C., founder of incomebuddies.com

For an Agile 50/30/20 budgeting plan, you’ll fix the amount you spend on needs and wants and allocate the rest of your income into your savings.

As you grow your income, the amount you spend on your “needs” and “wants” remains the same, but the percentage of income you can allocate to your “savings” increases exponentially.

The goal of the “Agile 50/30/20 Budgeting Plan” is to increase the percentage you save each month to be more than 20%.

  1. Create a basic 50/30/20 budgeting plan.
  2. Fix the amount on “needs” and “wants” so you may have the money to enjoy what you currently have.
  3. As your income increases, allocate the extra income into your savings so you can accelerate the rate (%) you can save.

The Agile 50/30/20 budgeting plan is created by Antony C. from incomebuddies in the year 2022, to help you shorten the time you’ll need to save for a house, a wedding, college, or even retirement.

Why is the “Agile 50/30/20 Budgeting Plan” a powerful tool that can help you save money fast?

Agile 50/30/20 Budgeting Plan is a powerful tool that can help individuals to save money because it is simple to execute, with an inbuilt mechanism that allows an accelerated rate of savings while preventing the possibility of overspending when an individual increases their income.

When this budgeting plan is executed by a savvy investor, it allows the investor to have more capital for investing in income-producing stocks.

With the power of compounding, the more you save, the more money you can use to invest, and thus the faster you can reach your financial goals and be capable to retire comfortably.

Read Also: How much money do you need to retire comfortably?

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

By Wise man

What Does It Mean To Create a Budget?

Budgeting is the process of creating a plan for the spending of your money. The spending plan is called budgeting. The creation of this plan will allow you to allocate your money into buckets, where you will plan in advance where will your money be spent.

In the process of your planning, you will balance your expenses with your income.

During this part of your financial planning, you will assign your future personal income towards expenses, debt repayment, and savings.

A home budget or personal budget provides an easily understood breakdown of how much money coming in and how much is going out.

Why is Budgeting Important in Personal Life?

Budgeting is important because it allows us to track our expenses, and visualize our spending habits. More importantly, budgeting can help us make better financial decisions, get out of bad debt, prepare for emergencies, and keep us focused on our long-term financial goals. 

Relieve you from your financial stress.

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 for the 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 on a luxurious trip to Hawaii?

A good budgeting strategy allows us to plan for the nice thing that we always wanted without us going into debt and breaking our bank.

Conclusion

The 5 Steps to creating your own “Agile 50/30/20 budgeting plan” is perfect for both beginner savers and savvy savers.

  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 (Agile 50/30/20 Budget 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 personal monthly budget and stick to it?”

If you like our post, feel free to subscribe.

What are your thoughts?

%d bloggers like this: