Creating a budget is an essential step of ensuring you will always have enough money to meet your needs and establish financial independence. Our in-house data scientist Catherine Zhou has a straight-forward way to think about your budget. You simply need to calculate five numbers.
Total Monthly Income - You can calculate this by adding the totals on your post-tax paychecks for a month.
Recurring Expenses - This includes rent or mortgage which should be less or equal to 30% of your monthly income. Recurring expenses also include bills like electricity, internet, gas, phone, and water. This category also accounts for an average spent on food and restaurants, other subscriptions, and fixed expenses. It helps to analyze these categories to spot places where you could be saving by changing habits or providers.
The next two categories are a function of the difference between your total monthly income and your recurring expenses:
Savings - At least 50% of your leftover income should go to your savings. Financial advisors recommend having at least 3 months of your monthly recurring expenses in your checking account in case of an emergency. After you’ve saved for a rainy day, you should consider investing. How much you allocate to the different types of investments will depend on your personal goals. Ask yourself: do you need cash you can withdraw in the coming years, or do you need money that can grow over time without touching it?
Discretionary Income - What is left over after you spend and save your money in the categories above? Discretionary income is what you can use for recreation and entertainment.
You can use a simple spreadsheet to formulate a budget with these numbers. Forbes recommended these 12 apps as tools to use for tracking your monthly spending habits.