**Hi everyone, Sal here and I want to talk a little bit about budgeting. At a very high level, a budget is a way of keeping track of how much money you’re bringing in and how much you are spending. The reason why you want to do it is to make sure you’re not spending more than you’re bringing in, and to make sure that you’re spending it on the things that matter more for you, especially in the long term.
When you set up a budget, you want to think about the money that you’re bringing in. This is often from your paycheck, and maybe you have other sources of money coming in. You want to think about that money after taxes, which can be sometimes significant. Then you want to think about where the money is going.
A lot of people talk about the 50, 30, 20 rule. This doesn’t have to be exactly 50, 30, 20, but it’s a nice framework to think about. 50% of the money that you bring in can be spent on needs, 30% on wants, and 20% on savings.
Needs are things that you pretty much need, like rent, groceries, insurance, and lease payments. Wants are things that you might like, but don’t need to survive, like going out to eat at a restaurant. Savings are for a rainy day, an emergency fund, and for big purchases like a house, or retirement.
The more money you can put on the savings side, the better. It doesn’t have to be only 20%, but that gives you a nice framework. For every $1,000 you bring in after taxes, you can spend $500 on needs, $300 on wants, and $200 on savings.**