Before you construct your budget, you should know how it should be allocated. Even if you previously were successful staying on budget, you still could’ve been at risk of incurring consumer debt or worse going bankrupt without knowing it.
Bare Necessities should only total 50% of your take home income, the main reason being is that the majority of Bare Necessity expenses are fixed monthly. The definition of a fixed expense is a monthly expense that has a set contractual price that needs to be paid monthly (mortgage, car payments, insurance payments, utilities etc.) otherwise there could be penalties for missing a payment. If you end up unemployed, Employment Insurance could potentially cover all if not the majority of your bare necessities (depending on your income) while you look for new employment.
In the event of an unforeseen expense, a plan with flexibility could allow an individual to cover those expenses without withdrawing from long term savings or even using consumer credit. Therefore, it is important to have a plan that covers your bare necessities while being able to afford everyday life expenses.
Bare Necessities consists of:
- Shelter (Rent, Mortgage Payments, Basic Home Maintenance, etc.)
- Food (Groceries and food staples not dining out)
- Clothing (Clothes to stay warm and go to work)
- Transportation (Automobile expenses, car payments, insurance, etc.)
“All work and no play makes Johnny a dull boy”. A perfect quote to reflect ones monthly plan, most people can not be expected to work all day and have no money left for their personal life. Such a plan would cause severe anxiety and potential missed opportunities. Ideally any plan should allow any individual(s) a 30% allocation for everyday life expenses (entertainment, vacations, going out, shopping, etc.). Such an allocation should be known and should be enjoyed. If you run out of money before the end of the month, you should wait until the next month before spending anymore money on life and increasing debt (or withdrawing from savings).
Savings is essential throughout one’s entire life. The earlier a plan can implement a solid savings plan the greater the opportunity to gain from compound interest from savings/ investments. A savings plan should be treated as a fixed payment, thus forcing a cap on Wants & Desires. In the event of an unforeseen expense a well structured savings plan can cover such costs without increasing debt. A 20% allocation can assist any plan in eliminating consumer debt, establishing an emergency savings account, and a long-term savings plan that pays down ones mortgage, saves for retirement, and allows an individual to achieve life goals before their golden years.
There are always options to reduce the stress of complying to a budget; however, without a proper budget allocation you may be reinventing the wheel over and over again. This methodology could apply to anyone in every income bracket, especially if their monthly cash inflows are fixed or even somewhat consistent.
Student Destinations provides its guests with a budget tool that will help fill in the blanks and help assess if a budget properly allocated or not.
If you require starting a budget from scratch, the Student Destinations Budget Designer workbook will help construct a top level budget by selecting one of many common budgeting variables.