How to Establish a Healthy Budget

Jul 1, 2012

We’ve all heard stories of individuals or couples who treat their credit cards as their own personal money tree. Instead of viewing their credit card as if it were a personal loan, they consider it an endless flow of cash. They visit store after store, indulging in all of the material items they can buy with their newly acquired piece of plastic. Their state of bliss lasts until they receive that bill one month later explaining that cash payment is due.

Then they begin pulling their hair, stressing over how they’ll repay their debt. The cardinal problem these people are guilty of is the exact problem that many payday and personal loan borrowers find themselves guilty of: they didn’t establish a healthy budget.

There’s a variety of reasons why people may not establish healthy budgets, one of which is because they don’t know how. The good news, however, is that establishing a budget is much easier than most may think. And with the virtually unlimited tools available online, creating a budget is becoming easier and easier.

The 50/30/20 Plan

One method of budgeting one’s money and expenditures is by sticking to what’s called the 50/30/20 plan. The 50/30/20 plan is one that’s touted by many economists and financial advisors. Elizabeth Warren, the former special advisor for the Consumer Financial Protection Bureau, even recommends the 50/30/20 plan.

The way this budgeting plan works can be seen in its name. Expenditures are broken up into three categories, and income is distributed to those categories in three allotments: 50 percent, 30 percent, and 20 percent.

Bills and expenditures that fall under one’s “Needs” are allowed 50 percent of one’s after-tax income. Needs include not only food and shelter (mortgage or rent), but also other items that are “needed” in our modern society. Minimal amounts of clothing, minimum personal loan payments, minimum credit card debt payments, insurance, transportation, gas, and anything else that is a necessity to operate successfully can be included as a “need.”

The next allotment is “Wants.” Wants are allowed 30 percent of one’s after-tax income. Most “wants” include everybody’s favorite purchases: restaurants, movies, extra clothing, video games, alcohol, toys, expensive cell phone plans, and any anything else that you can do without, but that you just really want. Also included in the wants category are extra payments on personal loan and credit card bills.

Finally, 20 percent of one’s after-tax income goes straight to the bank in the form of “Savings.” The reason for this large chunk of savings is because it creates a safety cushion of cash. This large sum of savings will allow healthy budgeters to save up for a large purchase, be prepared for an unexpected expense, or even completely pay off personal loans or credit cards.

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