Making a budget is the second most important part of personal finance (the first is to make financial goals – if you were wondering). Though it’s easy to say ‘I want to make a monthly budget’, it’s often not as easy as it sounds. To budget requires a good understanding of basic financial concepts and planning for strategic allocation of your monthly income.
However, the simplest way to budget your monthly expenses and income would be to follow the 50-30-20 method. This simple budgeting plan was created by Harvard bankruptcy expert Elizabeth Warren, who was named in Time’s 100 Most Influential People in the world. This method is recommended for most people who are looking for a minimalist budgeting plan.
To begin with, find out your after-tax income. Your after-tax income is the remaining amount of salary you get after all the necessary taxes have been deducted. This is the amount you have in hand to spend for the whole month. Use the 50-30-20 method to allocate a simple budget for yourself. Here’s how to go about it:
50% for expenses and other payments
As the title says, you need to allocate 50% of your budget for your monthly expenses and other payments. For instance, if your after-tax income is Rs.50,000, then allocate Rs.25,000 to the expenses account. Now all your monthly expenses, including car payments, loan EMIs, rent, and basic needs should take up no more than Rs.25,000 – that is 50% of your income.
30% for personal expenses
Your personal expenses on a monthly basis shape your lifestyle. For example, your monthly phone bills, movie nights, café trips, etc are all included in this 30%. Hence, if your after-tax income is Rs.50,000, then allocate Rs.15,000 for your personal expenses. You don’t necessarily have to jot down all your personal expenses, but do your best to stay within the amount.
20% for savings
The remaining amount of the Rs.50,000, which is Rs.10,000, must be allocated to savings. You can split this between long-term investments and those that you keep in as an asset to use in case of an emergency. A smart plan would be to divide this 20% further into 2 equal parts – one for your long-term investments and the other for your short-term funds and needs. Investing your short-term funds in a versatile tool like KyePot’s digital chits will allow you to grow your monthly savings faster than in a traditional bank product, and give you easy access to larger sums of money in case of emergencies.
This model is created to help you make a better budgeting plan. However you can make one yourself if this one does not suit your needs and requirements.
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