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Personal finance is tricky. In high school and even college, there are no required classes about financial literacy. Many people go through life with no clue about what spending is necessary or normal, what or where they should be saving, and how to manage all of the moving parts. Events like taxes, 401k rollovers, and paychecks are all vastly important to understand, but that gets confusing fast for a beginner. One very simple way to keep track of the moving parts is by establishing a budget for yourself. Just to get this out of the way, no, a budget does not restrict your freedom to spend. Instead, a budget gives you the freedom to spend. More on this later.

What is a budget?

Simply put, a budget is a tool that you can use to track your income and expenses, and work to achieve financial goals. In a spreadsheet, on a piece of paper, or in an app, having one place to record your cash flow gives you control over how much you are willing to spend. The basic idea is that when you allot a percentage of your estimated paycheck towards categories like food, debt, and savings, you relieve yourself of the money stress that comes from living in the dark. Even if your income is inconsistent, you can still budget – in fact, you probably should! If you have any financial goals (saving up for a trip, planning for retirement, making a large purchase), budgeting is a crucial tool to help you take control of your finances.

50/30/20

Perhaps the most popular school of thought on budgeting is the 50/30/20 rule. This framework suggests that 50% of your income should be budgeted for essential needs, 30% for wants, and 20% for savings. Essential needs include mortgage payments, groceries, transportation necessities, and healthcare. These are ticket items that are non-negotiable. No matter how tight the budget gets, you still have to make payments towards these items. Depending on your situation, this may include other things, but keeping this category to 50% helps create some leeway for the rest of your budget. 

The 30% is where you can really have fun. This section of the budget includes new clothes, travel expenses, subscriptions to streaming services, and more. This where your permission to spend comes in. See, a budget is not about reducing your expenses to bare necessities. It gives you the option to look at your money and see where it is going. If you find yourself wanting new shoes or an expensive haircut, put it in the budget and devote part of your 30%. Especially for special occasions, being intentional about saving for a specific thing will make you appreciate it more when you do get it, instead of splurging on a whim. Since this category includes wants, not needs, if you have a high amount of debt to pay off, a smaller than average income for the month, or any other unusual circumstance, this takes the hit. To cut back, buy groceries instead of going out every night. Cancel a few subscriptions or finally just eliminate that gym membership from January 1st. 

Now that 80% of your monthly income is accounted for between wants and needs, you are left with the most important of all: savings. Saving is an absolute essential. Whether you invest in mutual funds, individual stocks and bonds, or just take the standard 401k option with your employer, delegating 20% of your paycheck to saving for the future gives you a cushion. If you plan to retire, or have a goal to leave some money to the generations after you, this is for you. The simplest way to hold yourself accountable to this category is by automizing it. If you take 5 minutes to set up an automatic transfer every month or with every paycheck, you never have to worry about it again. A great system here is by utilizing the 401k. If you take 20% out before you even see the paycheck, you can save yourself the trouble of having to deny yourself the excitement of spending, because you never even saw the money in the first place.

This framework is a suggestion, but everyone has a different financial situation. If you tend to overspend, try some of the tips in this article to increase your savings and maximize your income. If you end up with some extra cash left over, set a financial goal, and start working towards it. No matter what step is right for you, it is always important to have a plan, and stay motivated.