Financial Literacy Tips: How To Build A Budget

In 2019, just before the global pandemic, 59% of adults in the U.S. were reported to be living paycheck to paycheck. For those experiencing that reality, it can be a challenge to balance expenses with limited resources, especially when the unexpected occurs–like a car repair, medical bill, or even a pandemic.
Here at Breda Savings Bank, we want financial literacy to be a positive part of your everyday life. With that in mind, we will walk you through a critical subject for taking command of your finances: budgeting.
Why do you need a budget?
It’s never a good feeling to look at your bank account and be left wondering where your hard-earned money went. Not being able to gauge how much you’re making versus the amount you’re spending each month can lead to financial stress and, unfortunately, potential financial problems.
Budgeting can help remedy that feeling and possible financial woes, giving you better control and confidence in your spending and savings through sensible planning. It can provide support by controlling spending in a way that ensures there is money to utilize as you work toward accomplishing your goals.
How do you create a budget?
The process of creating a budget can seem daunting or even intimidating, but you can build a simple budget by comparing your monthly income against your monthly spending. A common budgeting approach is to use the 50/30/20 rule.
With the 50/30/20 rule, you separate your money into three categories: needs, wants, and savings. Before we dive into the process, let’s demystify why they call it the 50/30/20 rule. The idea behind this financial rule is that you should consider spending 50% of your income on your needs, 30% on your wants, and 20% on your savings. By dividing your expenses into different categories, you can make more informed decisions on how to balance the use of your money in the future.
What’s the process for using the 50/30/20 rule to make a budget?
To use the 50/30/20 rule, there are seven steps to follow:
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Understand your monthly income
Income is simply the money you earn or receive each month. If you’re receiving money from a job, side hustle, allowance, gift, or scholarship, that would be considered income. Once you take note of every source of income, you’ll add them all up and record the total amount. This tally is how you begin your budget.
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Calculate your ‘needs’ budget
Next, you’ll calculate what you can spend monthly for your needs. Needs would be considered must-haves in order to live and stay healthy. A few examples of needs would be:
- Rent
- Utilities
- Food
- Transportation
- Cell phone
- Childcare and school cost
- Pet and food care
- Insurance
To determine the spending amount for your needs, multiply your income by 0.5.
Since Breda Savings Bank is located in Iowa, let’s take a look at an example of how an Iowan could use this rule. If your monthly income is $4,000 (average income for Iowans), your needs budget is $4,000 x 0.5 = $2,000. This result means you should try to keep expenses below $2,000 every month to cover your needs.
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Calculate your ‘wants’ budget
Your wants are the things you would like to have but are not considered essential needs. Some examples of wants include:
- Hobbies
- Entertainment
- Eating out
- Shopping
- Travel
To calculate your wants spending amount, multiply your income by 0.3. Continuing with the previous example, for your $4,000 per month, your wants budget would be $4,000 x 0.3 = $1,200. Meaning you can spend up to $1,200 per month on things you want or activities you want to do.
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Calculate your ‘savings’ budget
Savings is the money you put aside for future goals or unexpected life events. This is an important category to include in your budget, considering 42% of Americans have less than $1,000 in savings. Examples of things to save for include:
- Emergency fund
- Retirement account
- College fund
- Any other big purchase you are saving for
To establish how much you should save, multiply that monthly income by 0.2. In the case of the $4,000 example, your savings budget is $4,000 x 0.2 = $800. This means you should save close to $800 of your income every month.
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Record your actual spending
Once these calculations are finished, you now have your proposed budget. The next step is to find out what your actual monthly expenses are. Ways to figure out how much you are spending in a month would include checking your physical bank statements, logging into your online bank account or mobile app, reviewing receipts, etc. Separate each specific spending item and assign them to either the needs or wants budgets.
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Compare your expenses to your calculated budget
Now that you have your spending noted and assigned. Subtract those expenses from your calculated budget. The result represents your budgeted balance. If your budgeted balance shows zero or a positive amount, it means that you’re living within your means or have some extra money to allocate elsewhere. On the other hand, if your budgeted balance is showing a negative amount, that means you are spending more than you should and may have a budgeting issue.
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Make budget adjustments
No reason to fret over a zero or negative amount. That’s the beauty of this exercise. You can look at the other budget categories and see if there is money left to be reallocated. If possible, money from one category can be used to balance or offset a negative balance in the other.
In the event you discover that there isn’t extra money to move around, you’ll need to find ways to reduce expenses or increase income.
If you have a positive budget balance, you have the opportunity to decide how you want to use that surplus – from spending it on your wants to saving for future life events.
Overall, knowing where you stand financially today allows you to make better decisions for tomorrow.
For more insight on how to grow and secure your finances, visit BredaSavingsBank.com.