Budgeting in your 30s and 40s is important. If you want to be able to live an enjoyable lifestyle while accomplishing financial goals like buying your dream home, saving for a comfortable retirement, or paying for education expenses, you need a budget.
Budgeting doesn’t have to be hard. You simply need to know the three main parts of how to set up and stick to a budget.
Know Where You Spend
The first step in setting up a budget is to know where you spend. In order to know where you spend, you can use an account aggregation tool such as Mint.com and Personal Capital. You also review your spending by collecting your bank account statements and credit card statements.
Reviewing spending habits can be a little painful. Many people feel guilty about not knowing what they are spending their hard earned money on. Just know that this is a very important step to get your spending in check. Being able to see where your money has been going will allow you to actually set realistic goals of where your money should be going in the future.
Know Your Goals
The second step in setting up your budget is to know your goals. For example, do you want to be able to continue to take vacations? Are you trying to pay off credit card debt or set up an emergency savings fund? Do you want to save more for a long-term goal such as retirement, or save up for a new house or car? Knowing these goals will allow you to be able to see the big picture about how you’d like to use your money. It will help you actually stick to your budget.
Track Your Spending
The third step in budgeting is to be able to track your spending. People sometimes dread this step and have problems sticking to it. The easiest way that I found to be able to stick to a budget is to put your expenses into three categories.
The first category is fixed expenses. These are things that you have already committed to paying, such as a mortgage payment, rent, student loans, monthly bills, and expenses that are relatively the same every month.
The second category is variable expenses. These are things like shopping, eating out, groceries, entertainment, and anything else that you might or might not spend money on each month.
The third category is saving for your future. Instead of trying to save whatever is left over at the end of the month, having a goal for this allows you to set up automated systems so that you are paying yourself first.
The best way to track is to look at your past spending and then set a goal for your variable spending that is within 10% to 20% of your past spending. Set that variable spending target to come out of a different checking account, go onto its own credit card, or put it on a prepaid spending debit card. This is essentially like giving yourself a “Safe to Spend” allowance every month. If you have money left over at the end of the month, it rolls over to the next month.
Giving yourself a “Safe to Spend” allowance allows you to really focus on being intentional on what you spend your money on from a month-to-month basis. It also allows you to quickly see if you are able to stick to your variable expenses target amount. You can always try it out for one to two months and see if you need to adjust your goal number for variable expenses. Once you feel comfortable with this number, you can set up all of your savings to be automatic and you will have your variable expenses completely separated from the rest of your money.
Budgeting in Your 30s and 40s is Worth the Effort
Going through these three steps might take a little bit of time and some effort, but it will allow you to take control of your month-to-month financial situation, and allow you to get on track with reaching your financial goals much more quickly.
Katie Brewer, CFP® is a Certified Financial Planner ™ and President of Your Richest Life, a fee-only financial planning firm for Gen X and Gen Y. She believes you too should have access to financial resources and fee-only financial planning. For more information on the services offered, contact Katie today.