• Take Control of Your Budget
    Learn the 50/20/30 Rule and compare your budget to it.
    Day 1
  • Find Out Your Net Worth
    Learn how your net worth is calculated, and then find out what it is.
    Day 2
  • Save Thousands! (With Good Credit)
    Get your credit report and score, and learn how to improve them.
    Day 3
  • Break Your Bad Habits
    Recognize how you're spending unwisely, and set a new shopping rule of thumb.
    Day 4
  • Increase Your Income
    Learn how to negotiate, see how your income affects your lifestyle and find out your top job priority.
    Day 5
  • Figure Out What You Want
    Create a plan for your money, and get on the road to living your richest life.
    Day 6
  • Cut Your Costs
    Examine your four Essential Expenses and learn how to pare them down.
    Day 7
  • Get Control of Your Spending
    Start coming in under budget every month on those tempting Lifestyle Choices.
    Day 8
  • Get on the Road to Retirement
    Open your retirement account! Or increase your contribution to an existing account.
    Day 9
  • Pay Yourself First
    Make sure you have an emergency cushion, which you can draw on when you need support.
    Day 10
  • Review & Next Steps
    Find out your next steps and the financial habits that will help you reach your retirement goals even faster.
    Wrap Up

Day 1 Take Control of Your Budget

35 minutes

WHAT YOU NEED TO KNOW

You should be psyched today because you're about to get the key to achieving financial success, and reaching most of your life goals--and that key is a budget.

It may not seem like such a special secret, but a budget will allow you to control the flow of your money--and ensure that you save. If you can learn to stick to a budget day after day, month after month and year after year, you'll be able to achieve big life goals, such as buying a home or enjoying a comfortable retirement.

While on the long road to building wealth, your budget is your best ally. Unless you win the lottery, it's unlikely that you'll wake up one day vastly wealthier, but if you make a little effort each day, you can get there. And that bit of daily effort often boils down to a budget.

The 50/20/30 Rule

Of course, not any ol' budget will do. (35% of your income spent on dinners out, and only 1% allocated for savings? Not a good idea.)

So what is the ideal way to spread your take-home pay amongst your major expenses? Turns out there's a simple model that you can follow: the 50/20/30 Rule. Once your income comes in--and we're not talking about your salary, but rather what shows up in your bank account after taxes and 401(k) contributions--the 50/20/30 Rule recommends that you divvy up your spending in this way:

  • Essential Expenses. No more than 50% of your after-tax income should go toward essential expenses. Only four expenses fall into this category: housing, transportation, utilities and groceries.
  • At least 20% should go toward Financial Priorities--goals that are essential to a strong fiscal foundation. These include retirement contributions, savings contributions and debt payments. You should make these contributions and payments after you pay your essential expenses, but before you do any other spending.
  • No more than 30% should go toward Lifestyle Choices, which are personal, voluntary and fun choices about spending discretionary income. They often include cable, internet and phone plans, charitable giving, childcare, entertainment, gym fees, hobbies, pets, personal care, restaurants and bars, shopping and other miscellaneous expenses. Although lifestyle choices come last in the 50/20/30 Rule, you should never feel guilty about buying that expensive purse or ordering a nice bottle of wine at dinner ... as long as you've taken care of your essential expenses and financial priorities first.

Once you start following the 50/20/30 Rule, money will flow in and out of your life in this order:

There's one big benefit to ordering the flow of your money in this way: You'll only spend on necessities, and you'll actively put money toward savings before you spend on everyday items. Another plus? You'll always know if you're on track with your financial goals.

Why it matters

According to a Country Financial survey, only half of Americans use a household budget system. Sixty-one percent of those who do budget set a monthly savings goals, compared to only 30% of households that do not budget. And based on a nationwide survey conducted by LearnVest and Chase Card Services, the inability to stick to a budget is the second most often cited obstacle when it comes to achieving financial goals--right after credit card debt.

Today's TO-DO: Set Up your budget

It's time to get your budget up and running based on the 50/20/30 Rule.

Go to the budget setup page, or if you're keeping track of your budget in the LearnVest app for iPhone®, head to the Budget tab. Both the Web and iPhone versions will walk you through the process of inputting your income, entering how much you spend on essential expenses and determining how much you allocate toward lifestyle choices.

The Smart Budget will also ask you to set up Priority Goals. For now, since it may be hard to immediately start putting 20% of your income toward these goals, let's create a placeholder goal of 1% of your income toward a savings goal (and if you're already saving some money, but not 20% just yet, you can increase your savings by 1%). Later in this bootcamp, we'll help you free up room in your budget for your priority goals, as well as increase your contributions.

 



When you've completed your budget setup, it will show you what percentage of your take-home pay you're spending on each bucket of expenses and goals--and compare it to the 50/20/30 Rule. As a result, you'll start to see where you're spending too much, and where you can cut back.

review just how YOU'RE SPENDING

The next step is to head to your Inbox. By using the folders, you can categorize your expenses to see exactly how money has been flowing out of your life recently.

Now that you can compare how your spending stacks up to the 50/20/30 Rule, it's time to consider if you want to revise the way you're apportioning your monthly income across these expenses. If you're unsure of whether you have enough money to, say, put 20% of your income toward savings every month, don't worry. We'll spend the next few days working together to revamp your spending.

Once you've finished categorizing all of your recent expenses, and added your cash transactions to each category, click on the Inbox tab at the top of the page, followed by the Trends button, and then click on each folder on the left to look at your categories. Here are some key questions that you should ask yourself:

  • Which category is the highest? To find this out, click on the corresponding folder on the side. At the bottom of each trends page, you'll see the average amount you spend in that category each month. On the right, you'll see what percent of your monthly income goes toward it.
  • Where is my spending out of line with my values? Are you spending a lot on manicures, even though travel is more important to you? Do you wish that you were contributing more to charity and much less to happy hours?
  • In which categories am I spending more money than I expected?

YOUR NEXT STEPS

1. Revise Your Budget

Now that you know where your money's been going, in any category where you think you need to decrease your spending or allot yourself more money per month, select the "Edit Folder" button on the top right. In the pop-up, set a new folder budget. You can also rename folders to make the categories better fit your life. The amount you allocate for each area should be in line with your goals, yet realistic. Don't think you can get by on $50 for a month's worth of groceries just because you want to spend $500 per month on shopping.

Once you're done with that, click on Budget and scroll down to the bottom of the page where it tells you how your budget compares to the 50/20/30 Rule. It will tell you on the right how much you have left to allocate to different categories--or if you're over. Depending on what this amount is, you may have some extra money that you can put toward your debt repayment and/or savings goals. If so, edit your Priority Goals to reflect that. If you're over, keep refining your categories until you come to a feasible allocation.

Now you should have a workable budget that you can use to guide your spending decisions. Over the next several days, however, we will be refining this budget even further as we unearth more ways for you to cut your costs and align your spending with your goals.

 

2. Get to Know the Building Block of All Personal Finance: Your Budget

Need some motivation to stick to your budget?

Then, be aware of the surprising factors that can affect your budget:

Lastly, see how your spending stacks up against that of the average American woman in our infographic!

Did you find today's tips helpful? Share them with your friends!

Day 1
completed

Great Job! You Completed Day 1!

Don't you feel more in control already? You had a lot to process today as you set up the details of your spending. Tomorrow we'll zoom out and look at the entire picture of your finances.

Join the Conversation!

  • Katie Vitale

    Transportation is an Essential, but is that just gasoline for your car if you drive? Shouldn’t I include a budgeted big repair and new tires into that? What about inspection and registration? Those seem like set in stone transportation expenses too? I had my car insurance as a transportation cost, but then there’s an insurance folder in the lifestyle section.

    • Katie Vitale

      Could we define each of these Essentials groupings?

    • Sanyada

      I’m wondering if they could be added to the Service Charges portion of the budget. Even if you don’t spend the money each month, budgeting for and saving for it would be important. And when you get your car fixed, inspected/registered, tires replaced etc. it’s considered “servicing” your vehicle. That’s where I plan to add those figures when I go back and restructure our budget to better fit our goals and needs.

      • http://caitlinbates kindaslightly

        It’s wiser to have a folder for these types of things, and budget as if you would be spending it. I have one called “Car Maintenance” which covers oil changes, air filters, tires, wiper blades and washes. I don’t end up using that money every month, nor do I end up using all of it ever 3 months or so. But forcing myself to always have that extra on hand makes me sleep better at night. When I do need it, I know it’s there and I’m not having to scramble and re-balance my budget and take from areas I know I’ll need at a different time.

  • Sanyada

    How do we prioritize what we want to spend compared to what we do spend on specific categories? This month we spent more on gifts and groceries than usual, but spent nothing in other areas such as personal care or travel. What do we do if we are behind on bills when arranging our budget? Is it better to catch up first-or just budget that in?

    • http://caitlinbates kindaslightly

      I’ve been in that before and have just budgeted it in. Sometimes it means you need to pull from other areas that you would normally budget for, which isn’t ideal, but it’s better to budget for all of that so you know where your money is going, so that way when you are back on track, you’ll know what to budget for if it happens again in the future.