November 15, 2011
Ask the Money Coach: A Super Easy Budgeting Tip That Works
In tough economic times, many people want to start budgeting—or better stick to a budget—but they find it hard to do so.
Here’s an easy way to stay on track and maintain a realistic budget: use something I call “The 20% rule.â€
In a nutshell, the 20% rule says that whatever the bottom-line number you come up with in terms of your monthly expenses is, add 20% to it in order to get your “trueâ€ monthly bills.
So if you add up all your financial obligations — like rent/mortgage, food, utilities, and so on—and then you tell me that your bills are $2,500 a month, I’m automatically thinking they’re really 20% more, or $3,000 monthly.
The reason for this strategy is that many people underestimate their bills.
For example, when most individuals show me their budgets they’ve routinely omitted numerous categories, such as memberships, subscriptions, donations, money spent on gifts, year-round holiday spending, one-time expenses like car registration fees and more.
I’ve never had a single person show me a budget that was 100% complete and that did not leave out a certain category of spending or various expenses that the person accidentally forgot about.
Even if you consider yourself a master budgeter and you’re a whiz at tracking every single expense, another reason the 20% rule is helpful is because the extra 20% allows you to build a cushion in your budget.
I don’t want your budget to be so tight that every penny must be accounted for or your whole budget is thrown out of whack. That’s too restrictive.
If you find that you really didn’t spend that 20% extra, but you did budget for it, simply put the money into your savings or use it to pay down debts.
But do yourself a favor and start using the 20% rule immediately. It really can make a positive difference in your cash flow and in your budgeting efforts.
“Ask The Money Coachâ€ is a syndicated column written by personal finance expert Lynnette Khalfani-Cox, co-founder of the free financial advice blog, AskTheMoneyCoach.com. Follow Lynnette on Twitter at @themoneycoach.