Now that you understand where your money is going, we want to take the next step and manage that money.
We manage our money by budgeting for the next month on the calendar. If you're listening when this goes live, that is January.
Looking at your past spending, you then need to make decisions, based on the categories you've created, on what you want to continue forward with.
So how do we know if we're spending too much on a category? A well known guideline for spending is the 50/30/20 budget.
You allocate 50% of your income toward living expenses and necessities, 30% toward wants, and 20% toward debt and savings.
If we want to get more granular, here are a few more guidelines
- Housing: 25-30%
- Food: 10-15%
- Insurance, such as life, medical, home or auto: 10-25%
- Transportation or auto services: 10-15%
- Savings: 15-20%
- Entertainment and leisure: 5-10%
- Health: 5-10%
- Clothing: 5%
- Personal expenses: 5-10%
Once you've established your categories, it's about regularly reviewing them. Each month you'll set a new budget and should reflect on the prior month.
At first, you will do really poorly. But over time you adjust and learn better what your spending is.
Remember, we budget to know what we're spending and be intentional with it. NOT to control. This mindset shift will change the way you approach it.