My Top 5 Budgeting Rules
Rule #1: Save your money!!
When it comes to saving money, there are various sources that say saving 10% of your income is more than enough while others say saving 20% to 30% of your income is a more appropriate goal. I personally like to follow the 50-30-20 model which means 50% of your after-tax income goes towards necessities, 30% goes towards your wants, and 20% is put into savings/investments.
My Dad (who is a wealth advisor) taught me that he thinks 50-20-30 is a better ratio. This would mean 20% of your after-tax income would go towards wants and 30% - or even more - should go towards savings and investments. However, it’s important to know where you’re currently at in life and what your monthly payments are because maybe 30%, 20%, or even 10% isn’t possible right now and that’s okay! We all have different starting points and making it a goal to save more as your income increases or payments change is a great financial goal to have in itself.
Rule #2: Don’t Fall into Lifestyle Inflation
According to Investopedia, Lifestyle Inflation refers to an increase in spending as income increases. I personally think it’s so important to increase your savings percentage before you increase your expenditures. This way you continue to build towards your financial goals (even faster, might I add) before starting to live a more “luxurious” lifestyle than you did before.
Many people fall into Lifestyle Inflation and sometimes it’s hard to avoid. However, if you can help it, try your best not to fall into this trend and stay on track with your savings or investment goals. If you’re in debt and have an increase in income or maybe even earn a bonus, it might be wise to put that towards paying off your debt first before buying a luxury item or going on vacation, for example. It’s all about the big picture vs. instant gratification.
A tip I actually learned from a podcast recently is to live like you did the year before. For instance, if you made $60,000 last year and now you make $70,000 this year, live as if you still made $60,000 for another year before raising your expenditures. Whatever extra money you earn, put it towards debt payments or towards your savings and/or investments. I thought this tip was a great example of how to live beneath your means and is something I definitely want to implement in the future.
Rule #3: Establish a Rent/Mortgage Payment Budget
Another tip I learned from my various research is the budgeting rule of spending 30% or less of your pre-tax income on a lease or mortgage payment. This is definitely a little more challenging to do in big cities like New York and Los Angeles as the cost of living is very high. However, if you can help it, this is a good tip to try to abide by. I know some people that happily spend well over 30% on their apartment leases and personally I just don’t think it’s worth it. In my opinion, I definitely want a safe place to live but again, I don’t need to have the most luxurious living situation right now. I prefer to put my money elsewhere rather than to have it mostly tied up in my living situation.
Rule #4: Create an Emergency Fund
This is something that I am very passionate about and it is to make sure you have an emergency fund. You never know when something unfortunate happens. This could be anywhere from your car breaking down, your phone being stolen, or whatever the unexpected expense may be. It is important to have at least 6x your monthly expenditures set aside for a rainy day.
Rule #5: Don’t Dip Into Your Savings
I cannot explain how important this is because I, for one, am guilty of this. I personally have a hard time not dipping into my savings. I used to be terrible at this in college and to be honest I didn’t do the best this year (I explained this in my previous budgeting article). It’s so important to not dip into your savings unless you have a specific occasion coming up that you know you will need to dip into it for a certain amount. Otherwise, to be brutally honest, you’re cheating yourself. Try to only keep the money you intend to spend in your checking and limit the amount you dip into your savings as much as possible.
For more information on how I budget, I have pieced together my budgeting templates and financial habits that I have used to create a solid financial foundation for myself. This Budgeting Bundle is designed to help you take control of your finances and make steps towards achieving your goals on your financial journey.