This is the fourth blog post in our Financial Literacy Series, in which we discuss the relationship between your finances and your personal health and wellness—and aim to increase your financial literacy and understanding.
Making a realistic budget that you can actually use, ironically requires you to have a realistic understanding of your current financial situation. That is, you need to know the actual day-to-day numbers you’re working with in order to make a realistic, useable budget.
5 steps to make a realistic budget
1 – Gather all of your financial statements
To make a realistic budget, start with real, current numbers. Always know where your money is going. Collect the past several months worth of bank statements, credit card statements, bills, interest payments, and loan payments.
2 – Collect your income statements
Just as you should know how you’re spending your money, you must have a good understanding of your income in order to make a realistic budget. Gather information for all of your income statements, savings, and investments—that is any money coming into your accounts.
In a previous blog post entitled, By the numbers: The 50-30-20 budget, we discussed the 50-30-20 budget. This could either be an aspirational budget goal to work toward, or it could already be a realistic budget that you can actually use, depending on your financial situation.
Here’s the breakdown of the 50-30-20 budget:
- Fifty percent of your income goes to essentials and fixed expenses
Fixed expenses are regular bills and taxes, such as insurance, groceries, rent, debt payments, and mortgage payments that you must pay for every month. If your fixed expenses add up to more than 50% of your income, perhaps it’s time to evaluate your current source(s) of income, get a side hustle going, or find ways to bring your bills down.
- Thirty percent of your income goes to lifestyle
Lifestyle payment is anything non-essential but perhaps improves your life, happiness, and wellness in some way. That could be non-essential clothing purchases, eating out, trips, coffees, and so on. Of course, what is essential and non-essential will likely differ depending on your values and lifestyle.
- Twenty percent of your income goes toward savings and investment
This is aspirational, as some other budgets suggest saving and investing anywhere from 5 to 10% or even up to 15% of your income. Regardless of how much you can afford to set aside, this is essential in case of emergencies and unforeseen financial challenges.
4 – Review your income and expenses against your budget
Go through your monthly expenses and categorize them into essential, non-essential, and savings. Calculate an average monthly expense for the past few months. Do the same of your income and see how close your current spending is to the aspirational 50-30-20 budget.
5 – Find ways to tweak your spending to be closer to your realistic budget
What is your current spending ratio?
Is the 50-30-20 budget realistic for you now or in the near future? What can you say goodbye to from your non-essential expenses? Can you increase your income?
Find ways to tweak your spending to be closer to your own personal, realistic budget. Consider where your financial priorities lie when making a budget that works for you. Continue to work toward your budget goal and set it closer and closer to the 50-30-20 rule.