Reposted from www.learnvest.com
The first thing you need to know when you set up a budget is that your goal is to live on your net paycheck, the money that hits your bank account after all your deductions. That means your budget excludes any pre-tax retirement contributions such as those to an employer-sponsored 401(k) or 403(b).
You’ll divide that amount into three buckets according to what we call the 50/20/30 rule:
- No more than 50% goes toward Essential Expenses, which includes just four expenses: housing, transportation, utilities and groceries.
- At least 20% goes toward Financial Priorities, which are goals that are essential to a strong fiscal foundation. These include retirement contributions, savings contributions and debt payments. You should make these contributions and payments after you pay your Essential Expenses, but before you do any other spending.
- Lastly, no more than 30% goes toward your Lifestyle Choices, which are personal, voluntary and fun choices about spending discretionary income. They often include cable, internet and phone plans, charitable giving, childcare, entertainment, gym fees, hobbies, pets, personal care, restaurants and bars, shopping and other miscellaneous expenses.