Building a budget is the groundwork for all successful financial plans. As you move toward creating a comprehensive financial strategy, understanding your spending habits, and allocating your funds wisely is the first step in setting yourself up for long-term success.
Have you tried budgeting? There are so many different kinds of budgets out there for you to consider, and many of them are overwhelmingly intricate. Some advocate tracking every penny spent, and others suggest you switch to a cash-only system (which isn’t always practical in our modern world). These complicated budgets set us up for failure. Life is busy enough as it is to be stress-counting every penny you spend to make sure it’s correctly allocated. Instead, I suggest that clients use a simple budget to get them started.
It’s called the 10/20/30/40 budget. If you’ve followed my blog for long, you know I’ve talked about this before. That’s because I firmly believe it’s the best way to get moving in the right direction – especially if you’ve tried other budgets but haven’t been able to stick with it in the past. Let’s break down what the 10/20/30/40 budget entails, and why this method encourages financial success. Note – all of these figures involve your after-tax income.
10 – 10% Giving
I catch some flack when I recommend that people who may struggle to stay within the bounds of a budget give 10% of their money away, but it’s something I’ve believed in for a long time. My reasoning is twofold. First, charitable giving is scientifically proven to make us happier. When we spend money in a way that leaves us feeling emotionally fulfilled, we’re less likely to make unwise spending decisions in the future. Second, we’re all more fortunate than we realize. When we start using our money to give back, we become infinitely more appreciative of what we do have.
20 – 20% Saving
Saving is key to any successful financial strategy. First, I recommend fully funding an emergency savings account. An emergency savings account should be easily accessible and cash-based. The idea behind emergency savings is that you can get to it quickly in case of emergency – so having it locked up in a retirement savings account isn’t in your best interest.
Once your emergency savings is fully funded, you can focus on retirement savings and any workplace accounts. After that, you can start focusing on other investment options.
30 – 30% Debt Repayment
Getting out of debt should be one of your #1 priorities when creating your budget plan. Whether you’re under the burden of hefty student loans, or you have outstanding consumer debt – start throwing 30% of your after-tax income toward your debt burden to knock it out as soon as possible.
40 – 40% Everything Else
The rest of your budget is allocated to everything else. Start with listing all of your necessary expenses to ensure they’re accounted for. After that, the rest of your after-tax income is yours to spend as you choose.
Why I Love This Budgeting Method
The 10/20/30/40 budget is easy to follow from day one. And the best part? It’s likely not that far off from whatever current budgeting system you’re working with. I also recommend that people using this method focus on round numbers. The more you focus in on each individual penny, and making sure everything is spent correctly, the more likely you are to fall off the band wagon. In short? Don’t dork it up. The simpler the better.
I also love this budgeting method because it’s easy to tailor it to your unique needs. The categories are fairly broad. This budgeting style doesn’t dictate where you invest, or how much you should spend each month on groceries. There’s enough freedom here where you get to choose the most fulfilling way to spend your money – and I believe that that’s the easiest way to stay on track. Having a spending pattern that leaves you feeling fulfilled and happy makes it easy to make good spending decisions. If you feel boxed in and unfulfilled by your budget, you’re way more likely to overspend one month or to abandon the budget altogether.
Before you dive into the 10/20/30/40 budget, I want to offer you one piece of advice: know yourself. It’s easy to fall down when it comes to your budget. We’re all human – we make mistakes. The key is to remove distractions and to make it as easy on yourself as possible.
The more you can automate your budgeting strategy, the more likely it is that you’ll stick with it. A hub account might be the solution you need to make this happen. Your hub account is set up to take your income and distribute it toward your budgeted financial goals: giving, saving, debt repayment, and everything else. Your hub account pays out a “recreated” paycheck to you (40% of your after-tax income) to cover living expenses and any extras each pay cycle. This helps you automate giving, saving, and debt repayment – which helps them to remain a priority even when there’s a temptation to use those funds elsewhere.
Want to know more about setting up a 10/20/30/40 budget, and a hub account to increase your cash flow? Request a consultation today. I’d be happy to walk you through these budgeting steps, or to discuss your big-picture financial concerns.