Create a budget!

Create a budget!

We create a budget to better understand where we stand financially.  We give every penny of income a job.  We know exactly what we can spend on eating out.  On clothes.  On everything.  No more worrying we'll accidentally spend the money needed for next week's bills.

As you Embrace Your True Expenses, you smooth out your cash flow by breaking down larger, less-frequent expenses (holidays, birthday presents, insurance) and treating them like monthly expenses—saving for them each month.  Goodbye financial roller coaster, hello financial freedom...

Eventually, through careful use of our money we'll say goodbye to the paycheck-to-paycheck cycle, timing bills, and money stress.  When a bill comes in, you’ll just pay it.  If an emergency happens, you’ve got time to come up with a plan.

The first thing you need to know when you set up a budget is that your goal is to live on your net income, the money that hits your bank account after all your deductions.   

You’ll divide that amount into three buckets according to what we call the 50/20/30 rule:

1. No more than 50% goes toward Essential Expenses, which includes just four expenses: housing, transportation, utilities and groceries.
   
   
2. At least 20% goes toward Financial Priorities, which are goals that are essential to a strong fiscal foundation. These include retirement contributions, savings contributions and debt payments. You should make these contributions and payments after you pay your Essential Expenses, but before you do any other spending.
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3. Lastly, no more than 30% goes toward your Lifestyle Choices, which are personal, voluntary and fun choices about spending discretionary income. They often include cable, internet and phone plans, charitable giving, childcare, entertainment, gym fees, hobbies, pets, personal care, restaurants and bars, shopping and other miscellaneous expenses.

When it comes to money, there’s certainly no shortage of ways for us to spend it—food, rent, retirement accounts, a down payment on a house, gym memberships, gifts … you get the picture.

So where should my money be going?

When it really comes down to it, the answer is different for everyone. You may be in a hurry to pay off debt, so you’re willing to spend less on eating out in the meantime. Or you might live in a city where rent is prohibitively expensive, so you have to allocate more of your paycheck to housing.
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So what’s a budget-perplexed person to do? While we can’t give you a hard-and-fast rule for where to put your money, we did come up with a general benchmark to consider if you’re just starting to set up a budget: the 50/20/30 guideline.

​Whether you’re a parent with two kids or a recent college grad working your first job, this 50/20/30 guideline can help you not only figure out how much you may want to allocate to each area every month; it can also help you determine the order in which your money can be allocated.

50/20/30 Broken Down

The 50/20/30 guideline can be easy to follow because instead of telling you how to break down your budget across 20 or more different categories (who could possibly keep track of that?), it splits everything into three main categories:

1. Fixed Costs
These are bills and expenses that don’t vary much from month to month, like rent or mortgage payments, utilities and car payments. We also include subscriptions, such as gym memberships and Netflix accounts, in fixed costs because you’re committed to paying them on a monthly basis.

​When it comes to fixed costs, we generally suggest that you aim to keep your monthly total no more than 50% of your take-home pay.
Tip: If you’re trying to make more room in your budget, fixed costs can be a great place to trim.  For example, are there any bills or subscriptions you could reduce or cancel entirely?

​2. Financial Goals
Consider putting at least 20% of your take-home pay toward important payments or contributions that will help you secure your financial foundation.

We believe there are three essential goals everyone should strive for: paying down credit card debt, saving for retirement and building an emergency fund. But your financial goals can also include larger savings priorities like a down payment on a new home.

Tip: We recommend automating your savings contributions and debt payments to help make sure you’re saving consistently—and to help ensure you don’t miss a payment!

3. Flexible Spending
Finally, consider budgeting no more than 30% of your take-home pay toward flexible spending. These are day-to-day expenses that can vary from month to month, like eating out, groceries, shopping, hobbies, entertainment, or gas.

We include groceries in flexible spending because even though food is a necessity in your budget, how you spend on food can vary. Some weeks you might eat out more, while others you may buy more groceries to cook at home.

We often say that it doesn’t really matter what you spend your money on each month in this category, as long as you’re aware of your spending and not going over your total flex budget each month.

Tip: To determine your flex-spending amount, we recommend first subtracting your fixed costs and financial goal contributions from your take-home pay (the amount that hits your bank account after taxes etc). This way, you’ll know that the amount that’s left for flexible spending is truly yours to spend however you want.

One Note About Retirement

As you might have noticed, the 50/20/30 guideline applies only to take-home pay/income. Any contributions you make to retirement before your paycheck hits your bank account are not included.  For that reason, you may actually be contributing much more toward your financial goals than this breakdown would suggest.  And you may find that it’s a good thing to keep that retirement money out of sight, out of mind!