Budgeting & Saving 101: How to Create a Budget


by Christopher E. Mediate

As we so often hear, the best things in life aren’t free. But we really want them to be, don’t we? In a time where visibly looking the part is seemingly more important than actually BEING the part, this reality becomes all too real. Thanks to social media and today’s culture, it’s become easier than ever for our desires to take the driver’s seat in place of our better judgement. If only we were able to keep such luxury indulgence up for that long, paying no mind to our future. But this is not the case, as the true lifestyle you want to live – both present and future – requires balance and discipline. Here’s the good news: you have WAY more control over it than you think you do. And there’s no better (or easier) place to start building a solid foundation of financial knowledge than by learning how to budget and save.

Let’s tackle the budget portion to that equation first.

When it comes to setting financial goals, or even a financial plan in general, the main thing you want to avoid is putting the cart before the horse. In simpler terms, you do not want to be making financial decisions (big or small) without first comprehensively identifying what your own personal financial standing is. You want to find out what your cash inflows and outflows are, and then you will want to establish a method of keeping those inflows and outflows sustainable. Only then will you be able to set reasonable money goals and expectations.

Determine Your Inflows

The first thing you want to address is figuring out what your monthly income is. Establish the sources in which you KNOW you are receiving money from. This really goes without saying, but you should know when and how much you are getting paid. Some common sources could be:

  • Your Wage or Salary
  • Investment Income (e.g., dividends, capital gains, or interest)
  • Self-Employment Income (applies if you’re a freelancer, contractor, or running your own small business)
  • Rental Income (applies if you’re renting out a property)
  • Side Hustles
  • Retirement Income (applies if you are retired and receiving income from Social Security Benefit, Pension Plan, 401k, IRA or any employer/government sponsored retirement plan depending on line of work)

Again, these are just some common sources to help get the ball rolling.

Determine Your Outflows

Next, you want to address your expenses. From what you have earned through your income sources, where do you need to divert your earnings in order to satisfy your needs and wants? Keep in mind that everyone’s expenses will vary based on your lifestyle, location, and individual needs. This is the portion of the process that is the most personal to you. But also, it’s the most telling, because by the end of this part you will have the best idea of what your money habits are and what kind of money personality you have.

Now, what are some possible expenses? Like before, let’s run through some common ones:

  • Food (How much are you spending on groceries? How often are you eating out?)
  • Housing Costs (Rent, mortgage payments, property taxes, utilities, etc.)
  • Transportation (Car payments, gas payments, maintenance, public transportation usage)
  • Debt (Credit card debt, personal loans, student loans
  • Health Care (Doctor visits, medications, treatments, insurance)
  • Entertainment/Personal Care (haircuts, gym memberships, concerts, etc.)
  • Savings Accounts (college saving, rainy day/emergency fund, retirement, vacation, etc.)
  • Miscellaneous (money set aside for unexpected expenses/things that are more sporadic)

If you’re honest with yourself, you should have identified what’s holding you back, and in so doing, what you need to cut back on or cut out from your budget altogether. There are two keys here that you’ll want to note. The first key is to categorize which expenses are necessities and which ones are wants. The next key when organizing is to divide up what are fixed costs (consistent, month-to-month payments you make) and next what your variable costs are (payments you make that fluctuate).

The 20/50/30 Rule

Now that we have determined our income and expenses, and have both laid out in front of us (preferably in a spreadsheet format), we have now put ourselves in a better position to set reasonable financial goals and make more informed decisions with our money. And that’s great, because having a basic understanding of your inflows and outflows already puts you way ahead of most people. Those were the easy parts, however. The real challenge is staying on budget.

Just like when you are taking your fitness seriously, consistency is the key. But we’re all human, it’s hard to be consistent. Sometimes you don’t feel like dragging yourself to the gym. Sometimes you don’t feel like eating grilled chicken and rice – you want to treat yourself to Chick Fil A. You don’t feel like going to the grocery store this week and plan out your meals – you want to indulge and eat out all week. You get the picture. But I’m not here to stare over your shoulder like a personal trainer and smack the spicy chicken sandwich out of your hand. You can and should leave room in your budget to treat yourself every now and then; that’s why earlier I told you to place some of your expenses in a “Want” category.

There’s a much simpler framework for you to follow than any workout/diet plan, and that framework is the 20/50/30 Rule. The rule works like this: whatever your paycheck/income is, you want to calculate what your after-tax dollars are, then put 20% toward your savings, 50% to your necessities/needs, and 30% to your wants. Essentially, what this rule does is automate your spending so that you don’t have to do more thinking than you need to. Again, everyone is different, so you don’t have to follow the rule to a tee, but you can use some iteration of it and MUST adjust accordingly as your needs change.

The 20/50/30 Rule Applied

Before you go, let’s do a quick example. Say Steven’s after-tax income is $45,500 per year, with each paycheck being around $1,750. Now, we haven’t covered saving or financial goal setting yet, but the first part of the rule applies to both of those things. Steven would like to save toward a new car, but before he can ever begin saving toward that, he needs to address the glaring credit card debt he’s in – which is $4,000.

Steven wants to shake off this debt, so he takes 20% of that paycheck, which comes out to $350 and puts that portion toward paying off that debt. Fast forward to 4 months later, he’s paid it off passively using this method.

Back to the present, Steven sets aside half that paycheck ($870) for his necessities (a.k.a. your cost of living). And finally, 30% of that paycheck can go toward whatever Steve wants, which comes out to $525.

Or, maybe Steven wants to get rid of the debt sooner than what we said above, so he re-adjusts the rule so that he’s putting 30% ($525) toward those debt payments instead. He’d sacrifice how much he sets aside for his wants by 10% each paycheck, but then he’d be set to pay off his debt in roughly 8 weeks. Thus, he is able to start passively saving toward his new car much sooner.

The budget has been established and we have our systemized method of keeping that budget healthy. We can now move on to all of the different possibilities this opens up.

We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.