Do you ever feel like your money is gone as soon as your paycheck enters your account? Do you know you’re spending your money on? I suggest documenting your household’s cash inflows and outflows and doing the math to make sure there are more inflows than outflows. Then, categorize the spending into three categories: necessities, goals, and discretionary. Lastly, you can create your Balanced Money Formula budget. (If you need help, reach out to realadultingiseasy@gmail.com and I’ll help you for free.)
Below are some example items for each category. You can see that some expenditures clearly fit into one category, like groceries, while others could be in one or another, like clothing. It’s your list, so it’s up to you.
Necessities:
Mortgage/Rent
Utilities: electricity, water, internet, cell phone, TV
Car payment/maintenance/insurance
Gas
Groceries (food to live)
Medical
Gym membership (I count this as necessity on my list.)
Clothes (that you actually, truly need)
Goals:
Retirement savings: 401(k), 403(b), IRAs
General savings: emergency fund, house, car, etc.
Real estate investments
Discretionary:
Hobbies: golf, video games
Boating
Drinking alcohol
Eating out
Entertainment: concerts, shows, movies
Clothes (unnecessary ones)
Self-care: manicures/pedicures, excessive amounts of makeup
Misc. subscriptions: meal prep, clothing, pet boxes, etc.
You may recall the Balanced Money Formula from our post and podcast on budgeting. The most common manifestation of this budget is the 50/30/20 version: 50% to necessities, 30% to discretionary, and 20% to financial goals. What is the breakdown of your expenditures?
Some members of my circle and I worked together to complete this exercise for them. A realized he was right on track for the 50/30/20 approach. B noticed she was spending too much on clothes and entertainment. C realized she needs to step up her saving once her car is paid off. Each person drew their own conclusions once their inflows and outflows were documented.
We talked about this on the podcast, but I’ll reiterate it here. I tend to favor a Balanced Money Formula that weights the financial goals category higher, like 30, 40, or even 50%. The 50/30/20 approach is a great starting point, especially if you’re in your 20’s or 30’s, because you’ll be on track for a solid retirement at a reasonable age. If you’re older, though, and are hoping to retire in your 60’s, saving 20% won’t be enough.
My husband and I save about 50% of what we make, and we’re right around 30 years old. We do this because we want to “retire” (or become wage-optional) much sooner than our 60’s. For more information on our retirement philosophy, you can read this post.
Regardless of what your spending breakdown is, once you know it, you’re far ahead of many others. You can’t work towards your goals if you don’t know where you currently are, and that step is complete!