A personal budget - or lack of one - has a major impact on your finances. That's true from a day-to-day perspective and in the long term, too. Making an accurate, reasonable personal budget is a great first step. Over time, you'll likely want to make your budget as effective as possible, reducing unnecessary spending and increasing your sense of financial security. Let's look at what goes into building an ideal personal budget, and how you can make practical adjustments to your own budget over time to bring it in line with this standard.
What is an ideal personal budget?
It's important to note that the general idea of the perfect or most balanced personal budget presented by financial advisors and publications is a general guideline. Depending on your specific goals, income, obligations and other factors, it's entirely possible that the standardized ideal budget might not be exactly what you're looking for. With that said, let's look at the general concept of the ideal budget.
The 50/30/20 rule
The 50/30/20 rule is a commonly held piece of advice across the personal finance landscape. It's a simple way to take anyone's income - generally presented as after-tax income, meaning it includes money automatically deducted for health insurance and similar expenses, as NerdWallet pointed out - and divide it across the three major budget categories. This rule breaks your income down into:
-
50% for necessities: This includes the things you absolutely need to maintain a basic standard of living and avoid financial complications in the future. Common line items are rent, basic utilities (for many people, that means internet access but not cable TV), groceries, insurance and a few other categories.
-
30% for wants: As Investopedia pointed out, wants can be seen as upgrades and additions that improve your quality of life or provide some level of enjoyment. Budget items in this category include things like going out to eat, cable TV and streaming services and non-essential clothes and household goods. It's important to note that some purchases, might split themselves across needs and wants. For example, the price difference between the cost of a basic car and the nicer one you end up purchasing is a want, but part of the overall cost still a necessity.
-
20% for savings and debt: Saving money is a core component of any good financial strategy, and it's included in the 50/30/20 rule. This 20% also includes paying down debt, which is a short-term priority over savings. From there, you should build an emergency fund that covers 3-6 months of expenses to help you stay afloat in case of a major illness, accident or a layoff, then start investing in long-term savings.
Aligning your personal budget with this ratio
As long as you put the effort into tracking spending and income, then sit down to write out a budget or fill out one of the many templates available online, you can see how your current financial situation compares with the 50/30/20 ideal. Some changes, like reducing how frequently you go out to eat or cutting down on non-essential clothes or electronics, are relatively simple. In other cases, such as with expensive rent in a metro area where you need to live to maintain your current employment, you may need to dig into the wants portion of your budget in the short term. You can look for more lasting alternatives, such as moving to a less-expensive neighborhood, as your lease gets closer to expiring.
No matter how you choose to budget or closely follow the 50/30/20 rule, you need dependable savings and checking accounts to manage your money as it's earned and spent. To learn more about TAB Bank's effective options, such as High-Yield Savings and the Kasasa Saver® accounts, get in touch with us today.
If you are looking for even more information we have an eBook titled, How to Build a Personal Budget. Click on the tile below to access this valuable resource.
About the Author
Follow on Linkedin More Content by Boyd Hunter
