Budgeting...Everyone's favorite thing to do! When we wake up in the morning, before we brush our teeth, it's the first thing we all think about right? Well probably not! According to many surveys only about one third of Americans actually have a detailed budget. So either two thirds of Americans have really stinky breath, or it's just not a part of our daily routine! For many, budgeting means "I know how much money I make, I know how much my bills are, and I try to pay them on time!", but it doesn't have to be this way! There's an easier way!
Benefits of a Budget
Having a plan! When you create a budget, you are making a plan for your money. Instead of your money telling you what you can or can't do every 2 weeks or bi-monthly, however you are paid, creating a budget puts you in the driver seat. Tell your money what to do! Hey, you ten $100 bills, go pay my rent! And you three $20 bills, go take care of my light bill. What are you doing sitting there acting like you don't have a job to do?!? (talking to yourself and/or inanimate objects is a sign of intelligence, so I'm told..or not). When you have a budget, you know exactly what your bank account is able to handle, versus wondering what it can handle. You shouldn't go through your day saying "I wonder how much money I spent on XYZ this month" or "I wonder if I have enough money in my account to pay XYZ".
Having a budget in place also gives you peace of mind knowing that things are taken care of. If your budget is telling you that you don't have things taken care of...then at least now you have a clear picture of your financial situation (which allows you to plan for the future). You will now know where you are spending too much, where you can completely cut costs, and how much you can actually save. Everyone needs savings!
Fortunately, budgeting does not have to be apart of our daily focus. We don't have to think about our budgets everyday if we plan appropriately, use and continue to follow your own rules, and AUTOMATE AUTOMATE AUTOMATE! Here's a simple rule of thumb you can use to make budgeting easy!
So What is 5-3-2?
Well, thanks for asking! 5-3-2 stands for 50% 30% 20%, and is the amount of your income which should go towards certain aspects of your budget.
First, budget for 50% of your income to cover Fixed Costs. Fixed costs are your monthly bills that are guaranteed to come each month. Your home/apartment, car/insurance, and utilities: light, gas, internet and phone. Each month these are things that do not change on a monthly basis, or that may change slightly depending on use. They are also items that you likely cannot adjust for on a weekly basis. Every month you know your rent/mortgage must be paid, you must have electricity and/or gas for your home, and in the 21st Century you need THE INTERNET. In order to get to work you have fixed costs, either for public transportation or your car note unless, you take Uber or Lyft to go to work! And even then, that's still a fixed cost in the sense that you will need to get to work everyday.
One fixed cost that many of us Millennials have to deal with, is paying off student loans. These loans become fixed costs until paid off! If you don't have student loans, great! If you do, include these in your fixed cost calculations. So try to budget for 50% or less of your income to go towards these monthly costs.
Your next largest budget component are Variable Costs. These are costs that can change on a day-to-day- or week-to-week basis. Some of your variable costs are must haves...like food, water, and gas for your vehicle. You need to eat and drink water in order to survive, and you need a means to get to work so that you can pay off your fixed costs. Despite the importance of these seemingly fixed costs, they can be adjusted much easier on a daily/weekly basis than your rent, mortgage, or car payment.
Additional variable costs include items that you can live without: paid entertainment, gym memberships, club memberships, or that 15th pair of shoes in your closest that looks a lot like the 5th pair. This is the area where you can make an immediate change, without truly altering your life much or planning months ahead. With fixed costs like your home, you're likely not changing them from week to week, or even month to month.
Last, but certainly not least, reserve 20% of your income for Savings. Savings includes your Emergency fund, Investments, Retirement, and maintenance. Emergencies happen, and unfortunately if you're part of the 60+ percent of people who do not budget, and also have less than $1000 of savings, you are likely going to have to borrow or use credit to take care of these infrequent but expected occurrences. Save for it! You're going to get sick, possibly injured, get in a car wreck, need to repair your home or car...the list goes on. The more prepared you are, by having savings tucked away, the less likely you will need to dip into 5 and 3 for money. $1000 would be considered a baby emergency fund, while 3+ months of expenses is the goal! Saving 20% of your income will get you most families where they need to be savings wise, in 1-2 years. If you stick to the plan!
This simple plan may not work for everyone. Depending on your financial situation, you may prefer a more detailed budget, or you may need to adjust up or down on the percentages for each category to stick to a Simple Plan like the 5-3-2 Plan. If your income is lower, then your fixed costs are likely a larger percentage of your total income, and vice versa if you have a larger income. You may not be able to save 20% on a lower income, while others may be able to save more than 20% because their expenses are lower or income is higher. However, now that you have a plan for where your money is going, you know if you are able to reduce your spending, or if you need to increase your income in order to survive and thrive!
Can 5-3-2 work for you? Leave a comment below! In our next post we'll discuss the importance of Automation, as well as ways to help you stay on track of your budget.
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Akeem The Dream
I enjoy discussing and learning about technology, stocks, sports, and beating my wife at Dominoes! As I learn, I love to share with family and friends so that we can share our knowledge. Thanks for being apart of the journey!