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22 January 2015

Spending Too Much? About Time You Set a Budget

It is never too early to make a budget for your finances. The earlier you start, the healthier your finances will be.
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How do you start?
If you are starting to set a budget regularly, the 50/20/30 rule is a good place to start. Here is how it goes:

1. 50% of your income (or less if you manage well) should be spent on the essential expenses. Essential expenses include housing, food, commute and other necessary utilities. You have to make sure that your essential expenses are 50% or less than your income.

2. 20% of your income (or more) should be your savings contributions. Yes, you should put away 20% of your salary for the distant future even when you are in your 20s. In your 20s, your retirement might seem far away, but remember compounding interest pays well in the long run. When you start saving early, the returns are exponentially higher.

3. 30% of your income (or less) can be used for all the fun stuff. Going out for the movies, eating in fancy restaurants or getting the latest smartphone: all of these come under the umbrella of “fun stuff”. All of these expenses should not be more than 30% of your salary.

Tips that will help you stay within budget:
1. Use a personal finance app for tracking your expenses. You can update it on the go and it will help remind you to stay in budget.
2. Review your expenses periodically to make sure. When you review your expenses periodically you start reducing impulse purchases and increase your chances of saving more money. When I started making a budget, I realized that I was spending way too much on take-out food. Being aware of this expense, I consciously made the decision to order food less often and cook more.
3. Set an emergency fund aside that is worth at least 3 month’s salary. You might need this money anytime and having an emergency fund will allow you to take more risks with your career.

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