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When it comes to spending and saving, there are lots of hard and fast rules you’ll find out there about exact numbers and formulas. They’re great guides, but it’s crucial that you take into account your life goals as well as your current situation.

Sure, you want to build financial security, but if you’re doing it at the cost of your happiness and well-being, it’s not worth it. Instead, look at the following guidelines, then ask yourself questions to see what’ll work best for you.

Determining Your Fixed and Variable Expenses

Before playing with the numbers, figure out how much you have to work with. Tracking your income and spending habits will shed some light on what you can realistically save and spend. Remember, you want to look at your take-home pay, not what you make before taxes and deductions. 

Once you’ve done that, write down any life goals. Then think about what you need to spend or save in order to reach them. You may also want to think about your current income situation: Do you work a 9 to 5 (and get regular paychecks), or are you self-employed, so your income can fluctuate month to month?

Using the 50/30/20 Rule

A popular type of budgeting uses the 50/30/20 rule. Under this guideline, you spend 50% of your take-home pay on necessities, like your mortgage and insurance. Then 30% goes to wants, like shopping sprees, and 20% to savings and debt repayment.

Does your current spending fall under this guideline? If so, great. If not, you’ll need to figure out what’s going on. Are you spending more than 50%  on necessities? Or are you debt-free but still aren’t setting aside money for savings?

Accounting for Necessities, Then the Fun Stuff

Whatever situation you’re in, you want to make sure you account for necessary expenses first. If you spend less than 50% on necessities, great. You can choose to cut more or move onto looking at your discretionary expenses.

If you’re spending more, then you need to take a hard look at what’s going on. Maybe you upgraded your cell phone plan and now you realize you no longer need unlimited data. Or you moved to a new area, so your car insurance payments went up.

Whatever the case, try to follow as closely as you can to spending only 50%on necessities. If you go way over, you’re at risk of not being able to save or pay down debt, and feeling like you’ll never get caught up. If you’re way under, that’s great! You can adjust your discretionary savings and spending goal to a higher percentage.

Paying Down Your Debt

Moving onto savings goals and debts, the 50/30/20 rule suggests you set aside 20%. However, this may not be enough, depending on your circumstances.

If you have a ton of debt, 30% of your take-home pay may not be enough to make the minimum payments. If that’s the case, it’s a good idea to increase the percentage and find ways to cut back on another part of your budget. Think about whether you can negotiate down your insurance, cut back on going out to eat, or carpool to save on gas.

Since the 50/30/20 rule lumps debt and savings together, you’ll need to consider how much you can set aside to pay each. This is where you can think about your long-term and short-term savings goals. Are you looking to save up for a cruise? Or do you want to buy a house in the next five years?

Getting hard numbers down will give you an idea of what you’ll need to set aside each month to reach these goals.

Also, it’s a good idea to have some money for an emergency fund. Most experts recommend at least $1,000, but you may need more, depending on your expenses. If you’re self-employed, you’ll want to set aside way more than that, so you can cover your bills even if your income fluctuates.

Spending on the Fun Stuff

What’s the point of earning money if you can’t spend it on fun things? You may have a ton of bills to pay, and using money towards things that bring you joy will motivate you through the hard times. Here’s where you can assess whether spending 20% of your take-home pay is feasible for you.

For example, if you’re really into debt repayment, you may need to lower this percentage until your debt is paid off. Or, you want to spend more (maybe a big vacation is coming up), so you cut back your necessities. As long as you’re still achieving your savings goals and aren’t spending more than you make, do what you want!

Assessing and Refining  

A spending and savings plan isn’t a “set it and forget it” type of thing. It will change as your circumstances do. Let’s say you’re done with debt repayment. Where will all that money go — towards a larger emergency fund or back to your discretionary spending?

At the end of the day, you know what’s best for you. Once you take the time to assess your finances, make a plan and constantly reflect on it and refine it, you’ll be well on your way to financial freedom.

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