Beyond the Wallet EP 3: Building Your First Budget

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How do the wealthy stay wealthy? That’s, well, a lot to unpack. But one of their biggest advantages is a well-maintained budget. Luckily, you don’t need a team of advisors to build a budget.  I’m about to clue you in.

Hey MoneyLion, my name’s Austin Hankwitz and I talk about personal finance and investing online. I grew up in a small town in northeast Tennessee and when I got my first job – I had to figure out how to build my first budget. Let me share with you what I’ve learned.

Money Life Lesson: Long story short, it’s called the 50/30/20 Rule. By using this rule you can have balance between your wants, your needs, your savings, and your investing.

The Daily Deposit: Let’s zoom out. The average household in America makes $65,000 per year. (source pub and headline in title)[1]  We all know money will be taken out for taxes, so let’s assume you’re actually putting about $48,000 in your bank account annually, or $4,000 per month.

Using the 50/30/20 rule we’ll be allocating 50% of our take-home pay toward needs – this means rent, utilities, groceries, transportation.. things you can’t live without. Notice I didn’t say any type of groceries, right? We’re always being smart and thoughtful about the food we buy at the store. But, 50% toward the necessities, or $2,000 per month.

Next, we’re going to allocate 30% of our monthly pay toward wants – this is dining out, buying new clothes, those subscriptions… that’s right, I’m talking about you, Netflix. Pin down what exactly a want is vs. a necessity. Looking to allocate $1,200 per month here.

Finally, we’re going to allocate the remaining 20% of our monthly pay toward saving, investing, or paying off our debt. That’s $800 every single month you either pay off debt with, or stash away in a savings account.

If you’ve adequately done both of those things, you can also put money aside for a down payment on a home or investing toward retirement if you want. A little can go a long way if you regularly budget.

And just like that you can create a great game plan for building a budget that lets you live a little, while also being responsible with your money.

A quick heads up: this video is sponsored by MoneyLion. All content is for informational purposes only and should not be construed as financial advice.

Video Summary

Wealthy people establish budgets for themselves. These budgets govern their spending and investing habits. Building your first budget can help you achieve your net worth target and practice financial responsibility. This financial instrument is easy to create and apply within your life. We’ll outline some budget building strategies to help you gain control over your finances. 

How does building a budget help your finances?

Building your first budget forces you to clarify key financial metrics. You’ll control each purchase and assess its impact on your life and finances. We all want to have fun, but overspending hurts our long-term financial health.

A budget helps you balance wants, savings, needs, and investing. Maintaining harmony across these four areas reduces stress in our lives while increasing happiness. A budget acts as the roadmap to achieve your vision. 

The 50-30-20 rule

The 50-30-20 budgeting rule is a simple rubric for budget mastery. This rule determines money allocation across your needs, wants, and savings. 

50% of your take-home salary goes towards needs. These needs include food, water, shelter, and other essentials. Be thoughtful when considering necessities. You need clothing to survive, but you don’t need luxury brands to survive. 

Luxury clothing and other wants get 30% of your take-home salary. Wants range from subscriptions to vacations. You don’t need them to survive, but they enhance your lifestyle. The 30% allocation prevents you from going over the top with your wants. However, it provides enough space to have some fun.

20% of your take-home salary goes towards savings. Budgeters store this money in their bank account or put it into investments. This money compounds over time and provides financial security. Saving and investing help with retirement and provide a buffer if you quit your job or get fired.

Consider taxes before spending your money

We’ve mentioned the “take-home” salary several times. You’ll receive paychecks from your employer or clients if you provide a service. The government will stretch out its hand and ask for some of that money.

Many people get surprised by taxes and scramble to accumulate funds for their bills. Plan for taxes in your budgeting before spending a penny. The 2020 U.S. Census Bureau pegged median household income at $67,000. This household income comes to $5,583 per month.

Instead of using $5,583 as your monthly budget, pull money out for tax purposes. Taxes vary based on a person’s location and the deductions they can legally claim. Paying $19,000 in taxes leaves you with $48,000. Use this number when building your first budget so you don’t get caught off guard by tax season.

A little can go a long way. Practicing financial responsibility with your money now will set you up for a more attractive retirement in the future.

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