Basic Budgeting Strategies

Budgeting is something that many of us would rather avoid. But it’s an essential exercise—and often far easier than you think. In fact, investing time today will help you manage your money more efficiently and achieve your goals faster.

Reaching long-term financial goals isn’t just about investing. It requires saving, too—and you can’t do either without spending less than you bring home. A budget is simply a tool that helps you understand your spending while staying cash-flow positive.

But there’s the rub: You need to understand your cash flow to manage it. Many people have a clear picture of major monthly expenses like their mortgage and car payments, but they’re surprised to find how big a bite all the “little things” take out of their bank account. For example, spending $15 on lunch at work every day adds up to $3,900 a year.

Creating a budget helps you develop a clear picture of your cash flow and prevent overspending. Let’s explore three common budgeting methods and how they might work for you.

• The 50/30/20 Plan. The beauty of this approach is that it’s so straightforward. Simply group your expenses into three types: Needs, wants, and savings and debt. Specifically, earmark 50% of your income for necessary expenses (housing costs, utility bills, groceries, etc.). Then direct 30% toward discretionary items like entertainment or travel. Finally, dedicate the last 20% to savings and paying down debt.