The most difficult task when setting up a budget is adhering to it.
In general, you should not spend more than 50% of your income on fixed expenses. Here are some fixed expenses:
Rent/Mortgage and property taxes
Utilities
Car loan
Insurance
Cell phones
Groceries
Next, 30% of your income should go to savings and investing. I think investing can include investing in yourself, like taking a class or attend a seminar.
Last, 20% of your income will be fun money or guilt-free spending. This can be an expensive meal, sporting events, saving up for your next exotic trip, or anything that you want. Personally, I think everyone should have an annual travel budget. Traveling for the experience, for the people, and for the memories. It can only make you richer.
The main reason that you only use 50% of your after tax income on fixed expense is that if you are suddenly out of a job, you can easily cut back and adjust the other half of your income to stay afloat until you get back on your feet. Experts also advise us to have 6-months of emergency funds. However, this can be very tough to achieve.
Danh's Tips:
1. You can start by setting a goal to save one month at a time. Set up a savings account and make consistent contributions to this account until you achieve your goal. Then start having the same contribution for the second month. By following this method, you will gradually reach your goal of having a 6-months emergency fund.
2. I also use Mint to keep track of my spending. You can go to Mint.com to find out more about this service.
3. I use WiseBanyan as an automatic saving method. You can go to Wisebanyan.com to learn more. For the last couple months, my robo investment picks with WiseBanyan has beaten my own picks by 5-10% consistently.
How do you set your budget? Let me know by commenting below or send me an email.
Follow Chopsticks Alley on social media for more Tips like these.
Danh Truong CAL BRE#01951829 Realtor at EQ1 Real Estate danh@eq1re.com
Danh is a team member of EQ1 Real Estate and a Realtor practicing in the Greater Bay Area. He has been a personal finance student for the last 10 years. As a Coach for United Way Silicon Valley Credit Coaching program, he trained and educated low-income clients to improve their credit reports and scores. He helped them with budgeting and improving their finances. He is passionate about helping Vietnamese-American students manage their personal finance.