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| Try This Simple 5-Category Budget to Help You Manage Your Money |
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We realise budgets are an useful tool to reduce debt and build savings. But the thought of creating a budget from scratch can be overwhelming.
Lets begin with a practical approach. The simplest budget, the 80/20 budget, advocates committing 20% of your income to savings and 80% to everything else. Similarly, the 50/30/20 budget has you put 20% into savings, then divides the remaining portion into 50% for needs and 30% for wants.
But if you require something a little more specific and structured than that (but don't want to commit to a full budget worksheet), there is a second option . The following five-category budget allows you to break down your spending into simple, basic categories, so you can see where your spending should line up and make adjustments if necessary. If you follow this budget, you'll automatically be putting aside a portion of your money to both debt pay-down and savings, helping you reach your financial goals faster.
Housing
The most critical part of the budget is what you spend on the place you live. Ideally, housing should take up no more than 35% of your take-home income.
The housing budget includes the mortgage or rent, in addition to other housing-related expense: home repairs and maintenance; property taxes; utilities such as electricity, gas, water, and sewer; and homeowners or renters insurance.
If you are living in a high-cost-of-living area, hitting the mark may be difficult . If you truly can't trim your housing costs to 35% or less of your overall budget, you must look for ways to trim the other categories of your budget. Or, you may even reconsider your living situation: Could it be time to refinance, downsize, or take on a roommate? The critical part is that you have room in your budget for the necessities of life, including saving for the future.
Transportation
You may love luxury cars, which is alright as long as transportation expenses take up a maximum of 15% of your take-home income. If you have a car, you also have to account for the maintenance and upkeep of that car—not just the expense of your auto loan, if you have one.
Keeping in mind , transportation is just not your car payment. It includes everything: gasoline, oil changes, car washes, tune-ups, and car repairs such as a new radiator or timing belt.
Your transportation costs also include the amount you pay for parking, and if you ride public transportation, the money you spend on bus, train, or subway fare.
Other Living Expenses
Other living expenses, which are primarily optional expenses, should take a maximum of a quarter of your income. That includes recreational activities such as eating at restaurants, buying concert tickets, buying new clothes, going to sporting events, and taking the family on a nice vacation.
Your cell phone plan, cable bill, and other monthly subscriptions also fall in this group , unless you require it for work, business . Look at options to cut down on miscellaneous expenses if your spending outpaces your earning.
Savings
The saying "pay yourself first" is a good motto. With each paycheck, budget to save 10% of your pay. You might even set up a separate account that's less accessible, to reduce the temptation to spend this money; consider putting it in a money-market account or high-yield savings account so you can earn a little interest.
Your savings are primarily essential for an emergency fund, retirement, and investments in a new house or eve an old house, or the kids' future education.
Debt Payoff
Debt payoff should take around 15% of your income. This includes your credit cards or student loans. It does not cover your mortgage payment or car payment, which are listed under "housing" and "transportation." It includes any extra payments you're making toward your mortgage and car loan beyond the minimum.
The 80/20 budget and the 50/30/20 budget both recommend savings rates of 20%, but as per these budgets, "savings" included debt pay-down.
In this five-category budget, your savings and debt are listed as two separate categories. With 10% for one and 15% for the other, you in reality end up finishing 25% (in total) on a combination of savings and debt pay-down.
This is really aggressive and ambitious than the other two budget models recommend. The five-category budget can be used if you would like to create a workable budget that's slightly more detailed and effective, but not overly detailed or complex.
