Budget. Is there an unsexier word in the English language? Just the mention of budgeting evokes sad visions of rationing dry beans and stealing newspapers to get the coupon section. While it is true that a budget will reveal that you can't have everything you want all the time, a good budget can ensure you have enough money for the things that really matter, and free you from the stress and anxiety of not having enough money to go around.
A good budget should incorporate putting some money towards necessities (rent, food, health care), some money for enjoying life (recreation, new clothes, dining out), and setting money aside for the future. In other words; needs, wants, and savings. All three are critical aspects to a good budget. If any one is missing completely, your budget is unsustainable and needs to be revised. Sticking to a budget will limit what you can spend money on, but it's important not to give up "wants" completely, or you will abandon your new spending habits quicker than you can say "happy hour".
What we're working with: Determine your monthly income
For simplicity's sake, this article will assume you are a W-2 employee paid on an hourly or salaried basis. If you are self-employed or a contracted employee you will have to do extra math to determine how taxes figure into your budget.
Looking at your most recent pay stub, calculate the following:
- Gross pay x The number of paychecks per year / 12 = your gross monthly pay
For example: $1500 Gross x 26 bi-weekly paychecks per year/ 12= $3250 gross pay per month.
- Multiply that number by .10
$3250 x .10= $325
- Calculate your take home pay by amount paid out after taxes and deductions x number of paychecks / 12.
$1000 (amount paid after taxes) x 26 paychecks per year / 12 = $2167 net pay per month
Now subtract the second number you calculated from your net take home pay to your budget for the month. In our example, that number is $1842 ($2167-$325). This is the amount of money you have every month to spend on rent, auto, insurance, food, movies, clothes, bridge tolls, exotic lizards, World of Warcraft, or whatever else you might want to spend your money on.
What is that second figure that we subtracted right out of our budget? It's your savings; a completely non-negotiable expense that you should take out of your budget before you ever have a chance to spend it. Most articles on budgeting recommend including an expenditure for savings as part of your budget, but it is far smarter to simply take the money out of the equation, as though you never had it. Saving 10% of your gross income is the recommended amount to secure your financial future, but the amount you save is really up to you. But it is hugely important that you save regularly, and the best way to do that is to get a payroll deduction or automatic bank transfer set up so that a regular amount is put safely into savings before you can spend it. Consider it paying taxes to your 70-year-old self, and do not attempt to skip out on it. Unless you want to eat ramen through your retirement, this is a non-optional step.
Let's spend some money: Allocate your monthly expenses
Most budget advisors will tell you to track your expenses for the month to tell you where your money is going, but this article will spare you that tedious chore. The It doesn't matter one tiny bit where your money has gone - only where it's going to go.
Barely spending on bare necessities
First make a list of everything you need to spend money on, with the amounts you spend each month written alongside. Writing them in descending order of necessity is a good idea, since it can make cutting the fat as easy as tearing off the bottom half of the page:
- Health Insurance, doctor visits, prescriptions
- Car payment, insurance, gas, parking
- Student loan and credit card payments
Some of these amounts will be regular and therefore easy to list. For variable expenditures like food and gas, go into your online banking and find how much you spent on these items over the last three months and take the average to get a good general idea. Mint.com also makes it very easy to view your spending by importing your online banking transaction history and categorizing your expenses for you.
Add up your total expenses. You might be surprised to find how close just the necessities come to your total budget allowance. That's okay, for now. The next step is to look at all "needs", and find a way to reduce them. It's guaranteed that you have to spend money on your "needs", but how much you spend is largely up to you. The goal is to spend a little time now to save as much money as possible on the things we must buy, to have more money for the things we want.
- Can you find a smaller place to live? Can you negotiate your rent, refinance your mortgage, or shop around for cheaper homeowner's insurance?
- Consolidate your student loans. Call your credit card companies and try to negotiate for better rates.
- There are a million ways to save on food. Coupons, comparison shopping, cooking at home, going vegetarian, bargain club memberships, and growing your own vegetables are just a few of the ways.
- If you live in a city with good public transit, can you give up the car? Gas will only get more expensive and car repairs are a real money suck. A hidden benefit is that taking the bus gives you time to read, do work, call friends, or nap, all of which are tough to do while driving.
- Make efficiency improvements to your home to save on utilities.
- Automate your bills as much as possible with online bill pay to avoid late fees.
Get the amount you spend on "needs" as low as possible before moving on. There is no reason to spend more than you have to on monthly bills, and lowering them is often as easy as a phone call.
The fun stuff: managing your "wants"
After subtracting your "needs" expenditures from your monthly budget allowance, you are left with the monthly amount you can spend on the things that make live enjoyable. Make a list of things that you spend money on besides the wants, such as movies, dinners out, books, fight clubs, polka parties, and so on, and allocate your remaining money based on how much you want to spend on each. For now, it's as simple as that. Over the next three or four months, stick to your allocations as much as possible, and make adjustments where necessary as you find you spend more on one item than another.
Some ways to save on wants:
- Enroll in a daily deals site like Groupon, Bloomspot, or Google Deals, but be careful to only buy deals that you already wanted, or you'll end up overspending rather than saving.
- Find out if there are low-rent versions of activities, like renting movies rather than going out to the theater, that would be as good.
- Develop hobbies that cost little and can even make you money, like cooking, writing, or gardening.
The moral of the story
Budgeting is about making sure you have enough to go around. Save 10% of your gross income automatically before you do anything else. Look at your list of necessary expenses and aggressively examine ways to lower those costs. Use the remaining to pay for "wants", keeping a mindful eye towards ways to cut costs and make your money go further.