A budget shouldn’t be a pain to maintain. In fact, the concept behind budgeting is one that is meant to automate your finances so that you don’t have to worry. Here’s how you can stop worrying about your personal finance AND actually enjoy your life.
Here’s roughly what your budget should look like. We’ll go more in depth into what should change as you make more money, but this works as a baseline for now.
- 60% Necessities
- 10% Emergency
- 10% Investment
- 10% Learning
- 10% Fun
First, let’s talk about automating this budget: the most important part to make sure you follow it and secure your long-term success.
Your bank might look at you weird, but you’ll want a different account for each of these. Look into what options your bank has (or switch banks!). Separating your money into buckets like this means you’ll actually stick to your budget.You won’t want to skip this step: not doing this means there’s nothing stopping you from reaching into your emergency bucket for every little thing. (Making separate accounts is a relatively simple step that sets you up for success by creating an environment where it’s a lot harder to justify taking money from other buckets. )
It doesn’t matter how much you’re earning to start. Even if you can’t reach the 10% for the buckets, start with 1%. The most important thing is to set the habit.
The second thing you should do to ensure this works for you is to define exactly what expenses should fit into each bucket. This is especially important for the emergency bucket, as you don’t want it to just be an extra necessities bucket. For example, we can define an emergency as a hospital bill (NOT your routine checkups), or an unexpected important expense (NOT paying for everyone’s drinks). Necessities can be defined as your utilities (Food, Water, Electricity, Rent, Internet). Investment is for buying any assets that are meant to make you money in the long-term, and this should be automated, like a mutual fund (Long-term diversified investing beats out micromanaging or shorting the “best stocks this week” almost every time). Learning is where you invest in yourself, the most important step for young people and for anyone wanting to increase their earning potential (spend on upgrading your skills; essential if you think allocating only 60% for necessities is not enough to cover it). Finally, the fun bucket is where you are free to spend on anything you want guilt-free.
Your budget can change once you start making more than say, $150K a year. At this point, you’ll be spending a significantly smaller percentage on necessities. A good place for that extra money is an upgrade to your investments: Change 10% to 15%, or 20% and so forth as you earn more.
Remember, the small details are just that, small details. You don’t need the most optimal investments and personal finance management as long as you have consistency. Stick to a healthy spending plan like this and you’ll be ahead of most Americans, who are unable to afford a small $1000 emergency, plus you won’t have to feel guilty about spending money anymore.