Budgeting is the basis of all healthy personal finance habits. Get the budget categories right and you will be amazed how effortlessly you achieve your financial goals. A strong budget will assist you in preventing “spending leaks,” or spending money without thinking. It will assist you in ensuring that you have enough money to make your payments on time, even if your bills and income fluctuate from month to month.
Today we will go over essential elements you need in your budget. Throughout these essential elements, we will stick to the 50-30-20 budgeting rule.
A spending plan for recurring mandatory bills and expenses (NEEDS)
Mandatory bills form the greater motivation why most of us look for money. As you do your budgeting, the expenses that you are planning for here are those that you cannot do without like rent, monthly shopping, water and electricity bills. In total, these bills and expenses should ideally take 50% of your monthly income.
For instance, if you are making KES 50,000, you should spend not more than KES 25,000 on mandatory bills and expenses. If your mandatory expenses take more than 50% of your monthly income, that is a warning sign that you might be living above your means. Consequently, you should either downgrade your lifestyle or look into expanding your sources of income. Otherwise, you are headed for financial disaster.
A spending plan for your entertainment, giving and other miscellaneous spending (WANTS)
In your budget, you must slot the expenses that give your life meaning. Here is where your books, movie tickets, coffee dates, birthday gifts and things like that fall. Ideally, this category should take no more than 30% of your income. So, if we carry forward the previous example of KES 50, 000 income, then this category will receive KES 15, 000.
Life is beautiful and richer when you balance making a living and making a life. That is why I advocate for budgeting. Budgeting, which is essentially telling your money where to go, makes it easier for you to live a balanced, healthy life within your means even as you save, invest and work to increase your income sources.
A budget for savings and investments (INVESTMENTS)
This is your financial get-ahead category (and my personal favorite). This is the category that allows you to keep the money you make and multiply it. This category takes 20% of your income and includes money going into your emergency funds and other monthly investments.
If your goal is financial freedom, then this category is so important that regardless of how much you earn, you should not ignore it. The trick is to always ” PAY YOURSELF FIRST”, which means that you purposefully save and invest first, every month, before spending.
A budget for debt freedom.
If you have any debt, your budget should have a debt category where you prioritize consistent debt repayment and track your progress until you are debt free. Now, you might be wondering where the money for debt repayment will be coming from since, going by the 50-30-20 budgeting rule we have used virtually all the income.
If you are in debt, especially bad debt, then you have to cut down on your wants and direct the money towards debt freedom. You can also take up side hustles specifically to clear off your debts.
A spending plan for recurring non-monthly
Non-monthly costs include any bills and expenditures that are infrequent yet predictable, such as insurance premiums paid once or twice a year, school fees, subscriptions, home improvements and christmas.
Take some time to consider all of your spending over the course of a year, and write a list of all recurring non-monthly expenses that come to mind. Then, figure out how much they cost and then save up for them. To guarantee that the money is available when you need it, you can consider setting up a separate savings account for your irregular costs.
It is worth noting that some recurring non-monthly expenses like streaming subscriptions fall under wants.
At The Legacy Hub, your personal finance journey is at the center of everything we do. We want to see your savings increase and your investments grow. We want you to be an informed Chief Financial Officer (CFO) of your life and be able to make more money, keep the money and multiply the money. Visit our YouTube channel and Instagram page for more valuable insights on personal finance.