There are a number of budgeting strategies out there outlining how to best allocate your monthly income. Which one is the best? It really depends on one’s expenses, debt, and savings goals. One thing they all seem to have in common is the minimum amount of income that should be saved every month is 20%. At the Capital Reformer we have devised a budget that we believe provides good ratios for managing monthly income.
What is our perspective? 60% of your income should go to expenses, 20% to savings, 10% to wants (entertainment, etc.) and the remaining 10% to giving and/or paying down debts. The largest allocation of a monthly budget is always going to be fixed expenses (mortgage, rent, car notes, utilities, insurance, etc.). After fixed expenses what we refer to as needs — food, gas, etc. — typically consumes the second largest amount of a budget. Wants are the part of a budget that often leads to a reduction in the amount of available income to save. Some people spend too much money on wants which removes the ability to save and sometimes impacts paying fixed expenses on time.
For people without a budget currently here is where to start:
- Track every dollar — There are apps out there like Mint that will show you where every dollar you spend is going. The numbers do not lie
- Start saving incrementally — Start off small. Set a goal for how much you can currently afford to put into savings each paycheck and be consistent. As your financial capacity increases, increase the amount
- Evaluate your fixed expenses — If your fixed expenses are more than 60% – 70% of your monthly income, you may need to reevaluate them and see where you can cut back. For example, is your car note too high for your current income level?
- Evaluate other expenses and debt — Do you have a food budget? How much are you using credit cards each month( what is your revolving utilization)?
- Be honest about your discretionary spending — Spending too much money on wants will negatively impact the ability to save, pay down debt, and in some cases pay fixed expenses. One of the best places to start in a budget is reducing the amount of money spent on wants.
