If I have take-home pay of, say, $2,000 a month, how can I pay for housing, food, insurance, health care, debt repayment and fun without running out of money? That’s a lot to cover with a limited amount, and this is a zero-sum game.
The answer is to make a budget.
What is a budget? A budget is a plan for every dollar you have. It’s not magic, but it represents more financial freedom and a life with much less stress. Here’s how to set up and then manage your budget.
Budgeting and savings priorities
Priority No. 1 is a starter emergency fund.
Many experts recommend you try to build up several months of bare-bones living expenses. We suggest you start with an emergency fund of at least $500 — enough to cover small emergencies and repairs — and build from there.
You can’t get out of debt without a way to avoid more debt every time something unexpected happens. And you’ll sleep better knowing you have a financial cushion.
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Priority No. 2 is toxic debt.
Next, go after the toxic debt in your life: high-interest credit card debt, personal and payday loans, title loans and rent-to-own payments. All carry interest rates so high that you end up repaying two or three times what you borrowed.
Investigate options for debt relief, which can include bankruptcy or debt management plans, if either of the following situations applies to you:
- You can’t repay your unsecured debt — credit cards, medical bills, personal loans — within five years, even with drastic spending cuts.
- Your unpaid unsecured debt, in total, equals half or more of your gross income.
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Priority No. 3 is, again, saving for retirement.
Once you’ve knocked off any toxic debt, the next task is to get yourself on track for retirement. Aim to save 15% of your gross income, and consider topping up your super fund with personal contributions if you’re in a position to do so.
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Priority No. 4 is, again, your emergency fund.
Regular contributions can help you build up three to six months’ worth of living expenses. You shouldn’t expect steady progress because emergencies happen, but at least you’ll be able to manage them.
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Priority No. 5 is debt repayment.
These are payments beyond the minimum required to pay off your remaining debt.
If you’ve already paid off your most toxic debt, what’s left is probably lower-rate, often tax-deductible debt (such as your home loan). You should tackle these only after you’ve gotten your other financial ducks in a row.
Any wiggle room you have here comes from the money available for wants or from saving on your necessities, not your emergency fund and retirement savings.
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Priority No. 6 is you.
Congratulations! You’re in a great position — a really great position — if you’ve built an emergency fund, paid off toxic debt and are socking away 15% toward a retirement nest egg. You’ve built a habit of saving that gives you immense financial flexibility. Don’t give up now.
If you’ve reached this happy point, consider saving for irregular expenses that aren’t emergencies, such as a house deposit or your next car. Those expenses will come no matter what, and it’s better to save for them than borrow.
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FAQs
It requires you to spend: roughly 50% of your after-tax dollars on necessities. no more than 30% on wants. at least 20% on savings and debt repayment.
What is the 50 20 30 rule? ›
Key Takeaways. The 50-30-20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should dedicate 20% to savings, leaving 30% to be spent on things you want but don't necessarily need.
What is the #1 rule of budgeting? ›
Oh My Dollar! From the radio vaults, we bring you a short episode about the #1 most important thing in your budget: your values. You can't avoid looking at your budget without considering your values – no one else's budget will work for you.
What is the 50/30/20 rule of budgeting worksheet? ›
Monthly 50/30/20 budget worksheet. Keep your monthly budget and savings on track and on target with the 50/30/20 approach. Designate 50% of your income to needs (mortgage/rent, utilities, car payments), 30% to wants (travel, concerts, fashion splurges) and 20% goes directly to your savings account(s) and debts.
What is the 4% rule in Australia? ›
Withdrawing 4% of your retirement nest egg each year usually results in it lasting 30 years or so. Following the 4% rule means you should withdraw a maximum of $50,000 per year ($1,250,000 X 4%) to cover your living expenses.
What is the rule of 72 Australia? ›
A quick take on how the rule of 72 helps investors understand the pathway to building wealth. The rule of 72 is a simple concept. To figure out how long it takes for an investment to double simply divide 72 by the return. If you manage to achieve a 10% annual return an investment will double in 7.2 years.
How to budget $4000 a month? ›
How To Budget Using the 50/30/20 Rule
- 50% for mandatory expenses = $2,000 (0.50 X 4,000 = $2,000)
- 30% for wants and discretionary spending = $1,200 (0.30 X 4,000 = $1,200)
- 20% for savings and debt repayment = $800 (0.20 X 4,000 = $800)
The dictum is that 40 percent of your direct marketing success is dependent on your audience, another 40 percent is dependent on your offer, and the last 20 percent is reserved for everything else, including how the material is presented. The following is a brief breakdown of the 40/40/20 rule of direct-mail marketing.
What is one negative thing about the 50 30 20 rule of budgeting? ›
Cons. Risk of overspending. Allocating 30% of your income for non essential wants is a large amount of money, especially when compared with only 20% toward savings. Try not to spend money on things that aren't important.
What is the golden budget rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Let's look at some common budgeting mistakes to avoid that can help you on your road to financial freedom.
- Not having a budget at all. ...
- Not knowing your spending patterns. ...
- Not having an emergency fund. ...
- Not differentiating between wants and needs. ...
- Not leaving any wiggle room. ...
- In summary.
1. The zero-based budget. The concept of a zero-based budgeting method is simple: Income minus expenses equals zero. This budgeting method is best for people who have a set income each month or can reasonably estimate their monthly income.
Can you live on $1000 a month after bills? ›
But it is possible to live well even on a small amount of money. Surviving on $1,000 a month requires careful budgeting, prioritizing essential expenses, and finding ways to save money. Cutting down on housing costs by sharing living spaces or finding affordable options is crucial.
How much do I need to save a month to get $10,000? ›
By dividing your objective into smaller, more manageable sections, you'll be able to stay focused on your goal throughout the year. Short-term financial goals serve as a stepping stone to the goal in its entirety. To reach $10,000 in one year, you'll need to save $833.33 each month.
What is the 20 4 10 rule in Australia? ›
According to this rule, it's all about aiming for a 20% down payment, financing the vehicle for no more than four years, and ensuring that all monthly car-related expenses, from loan payments to insurance and upkeep, don't gobble up more than 10% of your gross monthly income.
What is the 45 day rule in Australia? ›
The 45 Day Rule, also known as the Holding Period Rule, requires resident taxpayers to continuously hold shares "at risk" for at least 45 days (90 days for preference shares, not including the day of acquisition or disposal) in order to be entitled to the Franking Credits as a franking tax offset.
What is the disadvantage of the 50 30 20 rule? ›
Cons. Percentage guidelines don't work for everyone: For some people, the 50/30/20 budget just isn't realistic — especially with today's rising cost of living. If, for example, debt alone takes up 20% of your budget and your needs far exceed 50%, you may need to take a different approach.
How much money should you have by 40 Australia? ›
How much super should I have?
| Age | Men | Women |
|---|
| 30–34 | $56,344 | $46,289 |
| 35–39 | $95,937 | $75,785 |
| 40–44 | $139,431 | $107,538 |
| 45–49 | $190,716 | $142,037 |
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