What is a healthy budget?
In short, a healthy budget is one that allows you to save as much money as possible, while still enjoying your life. It should reflect your goals and values, provide cash flow for day-to-day needs, and help you reach financial independence over time–all without restricting you to the point of financial exhaustion.
To create a healthy budget, it’s important to understand your income versus expenses and make sure both are realistic.
With that in mind, let’s examine a few of the most important factors you should consider when setting up a healthy budget that will provide you with both boundaries and freedom.
What Are Your Goals?
The first step in creating a healthy budget is understanding your goals–financial and otherwise. Perhaps you want to to save for retirement, buy a new car, or take an extended vacation each year. Whatever it is, having specific goals will help you craft a budget that gives you the flexibility to reach them.
After all, if you don’t have any goals, you won’t be able to accurately measure your financial progress.
Think of it like this: your budget is essentially just a roadmap to reach your financial goals. Without that roadmap, you’ll have a hard time staying on track and reaching the milestones you set out for yourself. But even worse than that, if you don’t have a destination in mind, you won’t be able to create a meaningful roadmap.
So, if you want to create a healthy budget, you first must create some goals.
How Happy Are You With Your Finances Right Now?
The problem with the term “healthy budget” is that it can vary from person to person.
For instance, if you’re struggling with your finances at the moment, then it might actually be healthy to cut your expenses to the bone until you get your money under control.
On the flip side, you might feel like you’re over-restricting your spending to the point where you never get to enjoy any of your hard-earned money. In that case, it may be healthy for you to pull back on your savings for a little while.
Before you create any sort of budget, it’s important to assess how happy (or unhappy) you are with the current state of your finances.
Once you know where you stand, it’ll be much easier to assess what the term “healthy” means for your current situation.
How Much Money Do You Make?
Another important factor to consider when creating a healthy budget is your income.
In other words, how much money do you make? And does it provide enough room to build your financial future while enjoying your financial present?
It’s important to have an accurate picture of your income so that you can set realistic expectations for yourself.
How Much Consumer Debt Do You Have?
While your income is important, it’s equally important to consider any existing consumer debt you have.
For instance, if you have a lot of credit card debt, then you may need to focus more on paying that down than setting up an aggressive savings plan.
Or, if you’re currently spending more money on a car payment each month than you are contributing to your retirement, then you may need to focus on paying that off so you can start beefing-up your Roth IRA.
Since debt is something that you have to pay each month, the more of it you have, the less freedom (and wiggle-room) you’ll have in your budget.
To put it into the simplest of terms, the less debt you have, the healthier your budget will be.
How Hefty Are Your Living Expenses?
Another piece of the puzzle to consider when creating a healthy budget is your living expenses.
I’m talking about things like rent/mortgage, utilities, transportation costs (gas, maintenance, etc.), food, insurance, and other responsibilities/obligations.
As a good rule of thumb, to live on a healthy budget, you should try to spend less than 50% of your take-home income on living expenses. Like I said, this is just a rule-of-thumb. For some, it might be a little more, while for others, that might be way too much.
Given Your Income And Expenses, What Is A Realistic Timeframe For Your Goals?
Finally, it’s important to consider the time frame of your goals. Are you trying to build wealth quickly or over a longer period of time?
For instance, if you’re looking to save up for a down payment on a house in one year, then it would be wise to focus a little more of your income on saving. In that case, a healthy budget might mean trying to save 30% or more of your income.
On the other hand, if your goal is to invest enough money to retire 40 years from now, then you might choose to be a little less restrictive with your budget.
It’s important to consider your goals and the timeframe in which you want to accomplish them—this will help you determine how much money you should allocate for saving and investing each month.
Living On A Healthy Budget
Once you understand what a healthy budget means for your situation, the next step is to set up a budget that will help you achieve your goals!
For instance, if your goal is to save $1,000 per month, then you need to figure out which expenses you can cut in order to make that happen. This means looking at your spending habits and reducing costs wherever necessary.
You may even decide to set up automatic savings transfers to help you stay on-track with your financial goals.
Remember, the goal is to create a budget that allows you to save as much money as possible, without over-restricting yourself to the point of financial exhaustion.
Speaking from personal experience, it’s better to create a slightly less restrictive budget that you can stick to over the long-haul, then it is to create a budget so tight that you start resenting it.
The Takeaway
If you want to reap all of the benefits that budgeting has to offer, you need to strike a healthy balance between saving and living. After all, what’s the point of creating a budget that you can’t actually live out?
Remember, budgeting is a life-long process, not a quick fix. So, take your time, assess the reality of your financial situation, and create a healthy budget that you can stick with over the long-haul.
Disclaimer: This information is for entertainment purposes only and should not be considered financial advice. Always consult with a qualified professional prior to making any financial decisions. You, and only you, are responsible for your financial decision.