Here is how you can create a livable budget
While considering financial rules of thumb, we prefer a simpler one that is easier to follow. The more complex the solution is, the less the chances it will be followed. The road to financial security is simple that goes through an effective and efficient way of allocating your earnings. This actually helps you to maintain proper cash flows.
Similarly, rule of thumb for creating a livable budget should be very simple. To make it simple and easy you should follow 50-30-20. These numbers mean that out of your total earnings (net and not gross), 50 per cent should go towards fulfilling your needs, 30 per cent towards your wants and remaining 20 per cent towards your savings and investment.
For this, you should be able to differentiate between needs and wants and simultaneously plan for future. Once, you know these terms it will be easy for you to follow the 50-30-20 ratio to create a livable budget.
Needs: These are the expenses that you cannot avoid or postpone as they are necessities. Various expenditures that come under this segment are your different monthly installments, rent, food, medical, minimum debt payments and work related expenses such as travel. They remain more or less constant over a period. Half of your net earnings should go towards fulfilling your needs.
Your need bucket should look something like this.
Wants: These are your desires. It feels good to fulfill your wants but even if you do not, it will not impact you much. These are something that you wish to have. Things those are included under want are eating out, expensive clothing and vacations.
Savings & Investments: Although, there is a difference between savings and investment, we consider it same for preparing budget. Savings and investments should take precedence to your wants. Your savings and investment should go to create emergency fund, retirement fund and other goals. If you are able to save more you can pay some of your long term debts and thus, live a worry-free life.
Regardless, this 50-30-20 ratio offers a broad measuring stick of where your money should be going. The ratio is not hard and fast and can vary depending upon your earnings. You can start with 90-5-5 and can gradually shift to 50-30-20. What’s important is - make such rule and stick to it. It will help you to sort your finance for long term.