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What Are the Best Ways to Budget?

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If you're looking to improve your financial well-being, there's no better place to start than by creating a budget. A well-planned budget will allow you to allocate your gross monthly income (the amount of money you make overall, pre-tax) to necessities, discretionary spending, debt payments, savings and more. Knowing recommended spending amounts for things like housing, transportation, food and entertainment can make it easier to find the places where your budget may be bloated and in need of trimming.

To be clear, the best way to budget looks different for everyone, depending on their unique needs and financial situation. The suggested budget described below is a good starting point for many people, but others may face unavoidable circumstances that affect their financial flexibility.

You may, for example, need to spend more on housing than the suggested amount because of overall costs where you live and work, or maybe you have to devote more of your budget to meet your minimum monthly payment on student debt. Ultimately, the ideal budget is one that stays close to recommended spending goals, but also acknowledges that sometimes you need to make exceptions for your circumstances.

Now let's review the places where you'll be spending money and consider how you may best allocate your budget. Where you fall within the percentage ranges for some categories will depend largely on whether you are renting or have a mortgage to pay.

  • Housing: No matter where or how you live, housing generally makes up the largest portion of your budget. This is also the section of your budget that most heavily depends on your living situation. It's generally suggested to spend no more than 30 percent of your income on housing expenses. 
  • Utilities: This category includes essentials such as electricity and water. No matter your living situation, it's generally suggested that you spend around 6 percent of your income on utilities.
  • Transportation: Whether you drive a car or take public transportation, 8 percent of your income is the recommended spending amount.
  • Healthcare: This category is for insurance payments, medical bills, doctor visits and other expenses aimed at making sure you're in tip-top mental and physical shape. Generally, try to earmark between 4 and 8 percent of your income for healthcare.
  • Food & Household Goods: This category is for things such as groceries and household cleaning supplies. The recommended spending amount generally ranges between 7 and 10 percent of your income.
  • Clothing & Personal Items: Ideally, this will equate to about 3 percent of your income.
  • Entertainment: This is the fun stuff and includes everything from movies to concerts to sporting events. Act responsibly and try to allocate between 4 and 7 percent of your income for entertainment.
  • Cash Spending: This should generally total between 1 and 5 percent of your income.
  • Education: This category includes everything from school supplies to tuition. It's generally recommended that you spend between 2 and 3 percent of your income on education, though this number may be much higher if you're paying down significant student debt. If you find yourself paying a large amount towards debt, or other education-related expenses, you may need to trim down what you spend in other categories.
  • Miscellaneous: This final category is for whatever is left over! Allocate between 2 and 4 percent gross income for miscellaneous and unexpected monthly expenses.

Hopefully, this roadmap will help you better understand the budgeting process. Now that you know the suggested percentages to allocate to each monthly budget category, it's that much easier to evaluate and reprioritize your spending if you find yourself paying significantly more than you'd like for things such as debt, housing or other expenses.

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