When it comes to budgeting, visiting or revisiting the 50/30/20 rule recommending that necessities account for 50% of your income, while 30% goes toward wants and the remaining 20% is set aside for savings can be a great starting point or helpful reminder.
And what do you do when your budget has fallen by the wayside or it isn't working optimally?
Review, measure and adjust are three key principles of budgeting.
1. Review
Your circumstances are not set in stone and that means your budget shouldn’t be either. Have your mortgage and insurance payments gone up? Has inflation increased the cost of groceries and other necessities? If so, then you ought to reevaluate your budget. If your necessities consistently exceed the 50% threshold, it stands to reason that you either have to find ways to reduce your expenses (spend less on groceries, for example) and/or lower the amount you spend toward your wants—while preserving the 20% of your income savings that’s setting you up for success in the future.
2. Measure
One of the most common reasons budgets don’t work is the failure to establish measurable goals. A budget is always great in theory, but if your budget is rarely (or ever)actually met, or if it isn’t even being tracked regularly, then it’s little more than an aspirational concept—the “all bark, no bite” of wealth planning. Instead, take the time and effort to track your spending monthly to know when you’ve overspent and when an unplanned expense is going to throw your financial equilibrium out of whack.
3. Adjust
This is the “rinse, repeat” step of budgeting. Since circumstances change, it is important to adjust your budget when your situation or goals change. And when inflation and volatile markets make life more expensive, the only way to keep pace may be to cut back (on needs and wants) and to save more. It’s not enough to have a plan; you also need to keep track of it and make adjustments as life circumstances change.