Step 2 of 10 Steps to Financial Wellness
Budgeting systems are designed to help you understand and evaluate your relationship with money. For step 2 in your financial wellness journey, you'll want to establish a budgeting system that fits your personality and money management style. These are four of the most common:
50/30/20 budget. This is a simple method but requires a lot of discipline. Set aside 50% of your budget for your needs, 30% for wants, and 20% for savings. Of course, you’ll need to make sure your income and expenses will work with this kind of budget.- Cash envelopes. If you use cash and don’t want to track every purchase, consider withdrawing the cash you think you’ll spend in a month (or in a week) and keeping it in envelopes designated for each category. Any time you make a purchase, just pull money from the envelope.
- Zero-based budget. Use every dollar of your monthly income deliberately until there is nothing left. If you’re not a cash spender, you’ll want to log each expense using your preferred method for tracking.
- Reverse budget (paying yourself first). With this system, you set aside a portion of your monthly income for savings goals like retirement and an emergency fund. Use the rest for your normal monthly expenses.
After choosing your system, you’re ready to actually create the budget:
- Tally up your totals. Calculate your total monthly expenses and all your income streams. If your income exceeds your expenses, you’re in good shape. If it’s the other way around, you’ll need to trim some discretionary expenses.
- Assign amounts to your expenses. List your wants and needs, write down the corresponding costs, then sum up the total when you’ve finished. Open a new spreadsheet and copy your list of expenses—fixed-cost needs, then non-fixed-cost needs, and finally, your wants. Assign an appropriate dollar amount for each.
- Review and tweak as necessary. You’ll likely need to adjust the amounts in each expense category every few months to keep your budget relevant.
Next up: Paying Down Debt
