How To Make A Budget

Make a personal budget you can live with

Creating and sticking to a family or personal budget is vital if you want to be proactive about protecting your financial health. Those who figure out how to make a budget they can live with are far more likely to avoid problems with creditors and debt, which also helps them secure financing for more valuable assets like automobiles and real estate.

There are dozens of different answers to the question of how to create a budget, ranging from systematic approaches to the so-called "50/30/20 rule." The method that's right for you depends on the amount of time you want to invest in tracking your personal finances.

How to Budget Your Money

The systematic approach to creating a personal budget is as follows:

  • Note your after-tax monthly income. If your income varies, use an estimate on the low end of the scale.
  • List all your necessary expenses. Make two lists: one for fixed expenses (whose amounts never change) and one for variable expenses (which may change from month to month).
  • Subtract your total monthly expenses from your after-tax monthly income.
  • Allot half of the remaining money for savings. Don't limit yourself just to a savings account; it's important that you put money away for your retirement throughout your working years. Maximize your 401k, Roth IRA or Registered Retirement Savings Plan (RRSP) contributions to the greatest possible degree.
  • Use the other half of the money as discretionary income.
  • Review your system quarterly to see if there are ways you can reduce expenses, increase savings or spend less on luxuries.

The 50/30/20 rule provides another answer to the question of how to set up a budget. The advantage of this method is that it gives you freedom and doesn't require you to keep track of absolutely every transaction you make. Simply allot 50 percent of your after-tax earnings to the necessities of life: rent or mortgage payments, utilities, transportation, food and clothing. Then, allow 30 percent for luxuries: eating out, nights on the town, splurges at the mall. Finally, save 20 percent of your money, or use the leftover 20 percent to pay down debt.

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