Financial planning can serve different purposes. You might use it to increase your wealth and standard of living or give yourself more freedom in life.
Not to mention, better budgeting may allow you to spend more time with family, take time off to travel, or ease into retirement by cutting back on work. It could also allow you to outsource certain tasks like cleaning or gardening to regain some free time.
Opportunities are endless, but they all begin with one important step: taking hold of and managing your expenses to create more wiggle room in your budget.
Set a Realistic and Manageable Budget
Before setting a budget, you need to understand where your money is going. First, itemize and categorize all your expenses. If you can't think of everything, then it's worth tracking your spending for a month to get a better handle. All told, expenses should be classified into one of three categories:
- Life expenses
- Work expenses
- Non-essentials
Life Expenses
This category encompasses everything you need to satisfy day-to-day basic needs for you and your family, including:
- Housing (rent or mortgage, insurance, property tax, and general property maintenance)
- Monthly utilities
- Cell phone and internet bills
- Groceries (food and beverages, as well as any pet food)
- Toiletries and cleaning supplies
- Healthcare (insurance premiums, co-pays, over-the-counter medications
Work Expenses
If you work at an office of some kind, then you're likely to incur work-related expenses that might include:
- Gas to commute to work
- Work attire and shoes
- Lunch and money for snacks
- Investing in professional development opportunities
- Memberships to professional associations
- Licensing fees
Non-Essential Expenses
This category includes everything else:
- Gym memberships
- Streaming subscriptions
- Shopping sprees
- Dining in and takeout
Don’t fall into the trap of fitting these nice-to-have luxuries into your life expenses category. Unfortunately, personal pleasures shouldn't be considered essential in the world of finances.
Create a System That Works for You
Many financial experts advise creating a budget around the 50/20/30 rule:
- 50% of income going toward life and work expenses
- 20% put aside for savings
- 30% spent on non-essentials
Use this as a framework only and adjust it to your own circumstances. If your income doesn’t allow you to come anywhere near this ratio, consider cutting down on some non-essential expenses or finding ways to increase your monthly earnings. If you have debt, a larger portion of your income might be redirected toward repaying it.
This analysis might also show areas where you could save without making any sacrifices. For example, you might be able to convince your employer to cover the cost of professional development. You might also decide it's time to ask for a raise or develop alternative income streams.
Follow Your Plan, But Remain Flexible
Once you create a budget that reflects your lifestyle, here comes the hard part: you need to stick to it.
This step can be made easier by using tools like the Monorail app, which allows you to plan, monitor, and automize your spending. Use it to pre-allocate funds to your savings account or automatically pay bills. This way, you'll have a clearer picture of the money you have at your disposal.
Don't Fall Victim to Overbudgeting Everything
At the end of the day, don’t become a slave to your budget. The whole idea is to set up a system and then revisit it occasionally — say, once or twice a year — not to constantly monitor every cent you spend here or there. Unexpected expenses will always be lurking around the corner. But having a solid balance between life, work, and non-essential costs and expenses can help you navigate it all with less stress.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
