GRAND RAPIDS, Mich. — Have you ever heard the saying: “A budget is telling your money where to go instead of wondering where it went?” If you’ve ever been in the camp of wondering where your money disappeared to, you’ve come to the right place.
FINANCIAL FITNESS: Elliot Grandia explains how to create a foolproof budget that actually works
Creating a budget that actually works starts with one crucial step: knowing exactly where you’re spending your money right now.
“If you set a budget and it’s going to be $400 a month on groceries, but for the last three months, you’ve been spending $600, your budget is going to fail,” said Gerald Green with Mattson Financial Services.
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File photo shows cash fanned out from a wallet.
Once you understand your spending patterns, the next priority should be building an emergency fund if you don’t already have one. Financial experts recommend saving three to six months of living expenses.
“Factor that into your monthly income budget, like we know that’s going to come off the paycheck. So instead of working with, you know, $1,000 a month, now, we’re working with $960 a month,” Green said.
Some costs are harder to change than others, like housing expenses. Green recommends spending 25 to 30% of your gross income on housing. For someone making $100,000 a year, that means spending between $2,083 and $2,500 on mortgage or rent payments.
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From there, a basic rule of thumb for budgeting is the 50-30-20 method. This approach allocates 50% of your income to needs like food, housing, and transportation, 30% to wants like dining out or entertainment, and 20% to savings, including retirement or paying down loans.
However, that final category may need to be flexible depending on your financial goals.
“Sometimes that 10, 15, 20% goes into savings. Sometimes it goes into a 401K, it just depends. And it’s going to ebb and flow, but you want to average over the long term,” Green said.
Another advantage of having an emergency fund? This approach prevents you from paying more in interest and penalties for early retirement withdrawals.
WATCH PART ONE OF OUR FINANCIAL FITNESS SERIES: ADVICE TO PAY DOWN DEBT:
Financial Fitness- Elliot Grandia breaks down expert opinion to pay down debt
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