The Best Ways to Create a Budget You Can Live By

It takes little more than a passing understanding of the United States economy to understand that the next recession might be right around the corner. In fact, people have already begun to talk about how it may be arriving sooner rather than later. Recent economic forecasts predict that the economy will not only slow down across 2019, but it will continue to do so into 2020... pointing to the fact that trouble may be just over the horizon.

If you’re worried about the next great recession and are still haunted by memories of 2007 and 2008, you have every right to be. But you also need to learn from the mistakes of the past. Things got so bad the last time because many, many people were caught off-guard. Based on that, your course of action is clear: You need to start preparing for this possibility, and you need to start doing so today.

This means getting real about a personal or family budget, which, thankfully, is a lot more straightforward than you might have thought.

Your Keys to Building a Better Budget

To build the most accurate and forward-thinking budget that you can, you first need actionable information to work from. That means figuring out your after-tax income, so you know how much money you’re talking about.

If you get a regular paycheck from your employer, for example, sit down and consider not only your taxes but also automatic deductions for things like health and life insurance and your 401(k). Do this for every member of your household and add all those totals together to get a better idea of the total amount of money you’re actually working with.

At the same time, you also need to get an accurate idea of what your monthly expenses look like. For the best results, don’t consider your spending habits just yet this early in the process. Instead, simply list everything that you ‒ and your loved ones ‒ spend money on to maintain the lifestyle you’ve grown accustomed to.

List absolutely everything, including not only the essentials like utilities but also streaming service subscriptions, the amount of money you spend eating out in a month, and more. Don’t hold anything back ‒ it won’t benefit you at all to pretend like you don’t spend $50 a month on coffee runs if you absolutely know that you do. If you need to, go through your credit card statements. A variety of smartphone apps are available that will help you get a granular look at your expenses moving forward.

The Beautiful Simplicity of the 50/30/20 Budgeting Plan

Once you’ve got that bottom line dollar value, the next step involves choosing a budgeting plan that you can stick by. Generally speaking, the 50/30/20 plan is popular, both because of its effectiveness and its simplicity.

As the name suggests, this plan says that you should spend about 50 percent of your after-tax income on pure necessities. This means food, utilities, rent or mortgage payments, and other critical financial obligations like that. You can absolutely spend money on things that you want but don’t need (like that night out on the town or that fancy new 4K TV), but it shouldn’t total more than 30 percent of your after-tax earnings. Then, the remaining 20 percent gets funneled directly into your savings account (or is used toward debt repayment).

Depending on the amount of debt that your household has, you may have to adjust these totals a bit. Not all debt is bad, but too much debt can obviously be crippling. Increase the amount of money you’re using to pay down debt in the short term to help create a steadier foundation from which to build for the long term.

Other Important Considerations

Going back to your expenses, now that you know exactly what you’re spending money on every month, look for opportunities to proactively cut back whenever possible. Do you pay $15 per month for a Netflix account that you don’t really use? It’s better to cancel that and pocket the $15 NOW before it becomes a requirement for you to do so during the next recession.

Finally, and perhaps most importantly, don’t be afraid to enlist the help of a professional if you’re not sure what to do. Diving into your finances can always be stressful from a certain perspective, and with the looming threat of a recession on the horizon, that will only get even worse. Rather than trying to do everything yourself and making mistakes in the process, consider enlisting the help of a professional to fill in some of the gaps that exist in your own knowledge.

Financial professionals have seen it all ‒ they’ve worked with every type of situation ‒ both good and bad and can bring an invaluable wealth of experience to the conversation. In the end, you’ll be left with more than just a budget you can live by. You’ll have one that sees you come out all the better on the other side because of it.