A budget calculator can help you determine how much your actual expenses are. Many people spend too much money without even realizing it, so a budget calculator can help you identify your bad spending habits so you can make a plan to correct them.
How much should you be spending?
There's no set-in-stone rule when it comes to budgeting, but one of my favorites is the 50/30/20 rule, which Fool.com contributor Jordan Wathen explains in depth in this article.
To sum it up, this rule says that you should be allocating the money you make in the following ways:
- 50% of what you make (after taxes are deducted) should go toward what you need. This includes the things you have to spend money on each month, such as housing, transportation, utilities, groceries, etc. Of course, all of these expenses have some flexibility. For example, a $500-per-month studio or a $5,000-per-month penthouse both technically meet your housing "need," so use out 50% guideline when determining how much you should spend.
- 30% should go toward things you want. This includes all of the things that are completely discretionary. Going out to eat and taking vacations are in this category.
- 20% should go into savings. This is the single most important part of your budget, and includes 401(k) and other retirement contributions as well as money you set aside for emergencies.
Admittedly, there are some categories of spending that are in a grey area here. Many people (including some experts) consider debt repayment to be a form of saving, and therefore include it in the 20%, while others consider it to be in the necessary expense category. Home improvements are another one. If your roof is leaking, getting a new one is a "need," while adding a pool is definitely a "want." Keep these points in mind when going through the calculator and formulating a budget.
How much are you actually spending?
Here's an excellent budget calculator that can help you determine how much you're actually spending on an annual basis.
Notice that this calculator doesn't take saving into account, rather, it just considers the money you spend. So, based on the 50/30/20 budgeting rule I mentioned earlier, the total amount returned by the calculator should be no more than 80% of your salary. For example, if you earn $50,000 per year, a good result with this calculator would show annual spending of $40,000 or less.
While you don't necessarily need to save 20% of your salary right away, it's important to take saving into account, so keep that in mind when coming up with a budget.
The goal here is to use the spending level indicated by this calculator to adjust your own budget accordingly and hopefully improve your spending habits.
Some budgeting tips and tricks
After you use the calculator, when you're coming up with your budget, there are a few important things to keep in mind.
Have specific savings goals. It's important to set goals for your budget, especially in the savings department. Your goals can be as simple as "call my HR department and increase my 401(k) contribution rate to 20%." Or, if you don't have a 401(k), your goal might be to maximize your IRA contribution for 2016. Whatever it is, incorporate it into the budget.
Be realistic. There's a fine line between aiming high and being unrealistic. If you've never successfully saved any money in your life, telling yourself that you'll put 30% of your salary into investments is probably not too realistic. The same can be said with budgeting $0 for dining out or entertainment. Be sure that all of the numbers in your budget are achievable.
Be flexible. When I make my own budgets, I like to leave myself a little wiggle room to account for unexpected expenses. Let's say you're on a trip and you get snowed in at the hotel, but you've already exhausted your dining out and travel budgets for the month. What are you going to do? Dip into savings or put the money on a credit card? It's much easier to have a "whatever" category just in case you need it. If you don't end up spending it, just add it to your savings.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.