Do you know how much money you spend on various items each month? If not, it's time to sit down and make a realistic budget. Experts say that even though more than 80 percent of families and individuals have written budgets, few follow them as closely as they should.
What does it take to create a realistic and achievable budget? There are some tried-and-true components for every realistic budget, but you need to know how to avoid some common pitfalls in order to make it achievable. The key is being honest when you put numbers down on paper, ummmm...or in an app. After all, that simple monthly budget template you use becomes less simple if you falsify the numbers. There are a few other tricks to getting things just right. Here is a summary of what financial advisors say about common sense budgeting for families and individuals.
Use National Averages as a Guide
It's easy to find a list of national averages for each budget category like housing, food, insurance, etc. But remember that those numbers are just that, averages. Depending on how you live, how many people are in your family and other individual factors, your own budget numbers might need to be adjusted upward or downward from the statistical norms. For example, knowing how much to spend on rent can be tricky. While averages are about one-third of total income, living in higher cost cities like Boston, Tokyo and Toronto, housing costs might take upwards of 40%+ of your income.
Use Real Data Sources to Make Estimates
Another guideline for budgeting says you should spend about 20 percent of income on debt and savings. Be careful to avoid using that figure when you create your own budget. Look at bank statements and any written records you have to see how much you have been putting toward that category and use the data accordingly. Likewise, it could be worth downloading an account aggregator app that automatically calculates cash flow and expenses each month.
If you discover that you only put five percent of income toward debt and nothing toward savings in the past couple years, that's a good starting point. Consider experimenting with adding enough to the savings category to make the entire savings and debt amount equal to 20 percent of your income. Then use that figure for your proposed budget as you work through the rest of the categories.
Make a Pro Forma Budget
If this is your first time attempting to create a realistic budget, come up with what experts call a pro forma version and try it out for three months. If, after the 90 days are up, you see areas where you might want to make some adjustments, then do so. But try your best to stick with the pro forma budget for the entire three months in order to get a feel for achievable it is.
Consider Using a 50-20-30 Strategy
If you want to try the popular 50-30-20 budget, divide the categories like this: Put one half of your income toward basic needs like food, rent, utilities, healthcare and transportation. Put 20 percent toward debt and savings. Put the remaining 30 percent toward what experts call the wants category. This includes things you could live without but should have room in your budget for, like vacations, entertainment, eating out at restaurants, etc.
