How to Budget: 4 Categories to Plan Your Money

How to budget

For many people, budgeting is just not any fun. It means limits or lack or even punishment. But having a budget or some form of a budget is really important for your financial success. I personally prefer the word "plan" to the word "budget"  because it doesn't sound so constraining.

In order to successfully plan, you need to understand where your money goes each month and then you can create a plan to help you re-adjust your spending and/or help you ensure you are within the ranges of your plan.

You can break your monthly budget out into four categories and they are as follows:

Budget Category #1 - Money for your future self & your emergency fund

Ever heard the words "pay yourself first"? This should be a consistent part of any plan you make. Before you pay any bills or do any shopping, a portion of your earnings should be diverted into your retirement account for your future self and your emergency savings accounts for a rainy day. No ifs, no maybe's. Just do it.

Time goes by so quickly and planning for the future version of you will ensure that you can enjoy your retirement and not have to depend on the government or your children to take care of you. Also having an emergency fund provide you with a buffer in the event of a rainy day so that you can rely on your emergency savings instead of a credit card or other debt.

Budget Category #2 - Essentials / Needs

Next would be your essentials - the things you need to live your life. This does not include money for shopping or getting your nails done. This is for things like your housing costs (mortgage or rent), transportation and food. Also this category also includes money to pay off any debt you have e.g.your credit card debt and student loans because it is essential you pay them off as soon as you can.

Budget Category #3 - Other Money & Life Goals

This would include money you are saving outside of your retirement account. i.e. your mid term savings and investments for the next 10 - 15 years, business savings, saving for a home purchase, college savings etc

Budget Category #4 - Everything else

This is where your splurge money would fall under. Money you would spend shopping or saving for a wish list item, eating out, traveling, entertaining yourself and whatever else it is that you would typically do to enjoy your life.

For each of the categories mentioned above, below is a guideline of how your money can be allocated:

20% - Money for your future self & your emergency fund
50% - Essentials / Needs* (less than 50% is even better)
15% - Other money & life goals
15% - Everything else

(* If you have debt, you should plan to pay as much as you can towards your debt each month. You should also consider lowering the amounts you contribute to categories #3 and #4 while you focus on paying off your debt). 

After tracking your spending, if you can allocate your finances into these buckets and percentages you are well on your way to having a solid money plan for each month.

Like with everything money related, sticking to your plan requires discipline. If you struggle with your plan initially, having an accountability partner is a great idea!

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