The idea of a budget can sometimes be a negative one due to its tendency to limit spending. However, a budget doesn’t need to be viewed in a negative light at all when you consider what it really is. Quite simply, it’s a money plan. Just as you might have a career plan, investing plan […]
The idea of a budget can sometimes be a negative one due to its tendency to limit spending. However, a budget doesn’t need to be viewed in a negative light at all when you consider what it really is. Quite simply, it’s a money plan. Just as you might have a career plan, investing plan or retirement plan, the idea of a money plan (AKA budget) is to set you up for success with your hard-earned money.
So, how do you actually set up a budget? Whether you’re a budget rookie or have attempted setting up a budget before, here are some tips to help you get started.
Analyze Your Month
Really, this means not trying to plan for the ideal month but to tackle the current month. Since no month is exactly the same as the month previous or the month following, just work with what you have. Just plan to fine-tune your budget each month, and as you go forward, the process will become easier. The simplest way to analyze your month is to get a notebook, pen and calculator and start writing things down. If you’re so inclined, a simple spreadsheet will do the math for you as you go along. As a bonus, at the end of the article you’ll find a list of helpful budget tools if you want to step up your budgeting skills a bit.
List Your Income for the Month
Do you get paid weekly or bi-weekly? List each paycheck separately. If you have a side hustle or a spouse that works, include that income as two separate line items. Then, calculate your total income for the month. This is what you have to work with when you’re planning your expenses, investing your money and saving for the future.
List Your Expenses for the Month
Expenses fall into several main categories that you need to consider: giving, saving, housing, transportation, food, lifestyle, insurance and debt. Thinking about how specific you can be in each category can be very helpful in seeing where your money goes. Here are a few tips for each category and recommended budget percentages from money guru Dave Ramsey that each category should consume.
- Giving (10%-15%) – Do you have any charities that you give to regularly? Maybe you are participating in a 5K fundraiser or a charity raffle at work. You may want to keep some cash in your wallet to give to a homeless person or to buy lunch for someone less fortunate than yourself. Any of these items and more can be put in the giving category.
- Saving (10%-20%) – Having separate savings categories (along with specialized accounts) can help you reach your savings goals. Some ideas you may want to include are retirement savings (if yours aren’t directly deducted from your paycheck), emergency fund, home improvement, Christmas and vacation.
- Housing/Utilities (30%-45%) – Of course, housing costs include your rent or mortgage, but they also include maintenance, repairs and utilities such as water, electricity, natural gas, cable, phone and internet.
- Food (10%-15%) – Categories common under this heading include groceries, restaurants and special occasions. It’s sometimes easy to overlook food costs such as a friend’s birthday dinner or holiday food, so don’t forget to include those items.
- Transportation (10%-15%) – Even if you don’t own a car, you most likely have transportation expenses of some kind. Whether it’s a monthly MetroCard in New York City or rides with Uber or Lyft, transportation costs add up. Also, in addition to a car payment, you can include car insurance, oil changes, a weekly carwash, and parking fares in this category.
- Lifestyle (15%-25%) – This category is where you may find some surprises in the ways you spend your money. Some subcategories that fall here include clothing, personal care, household items (Target run, anyone?), gifts, recreation, entertainment and more. It’s also a good place to add a miscellaneous item if you don’t know where else to put it.
- Insurance (15%-35%) – Unfortunately, insurance costs are on the rise. This category includes everything from health insurance and car insurance to rental/home insurance and long term care insurance.
- Debt (0%-15%) – Hopefully you don’t have too much in this category, but if you do, list it and tackle each debt a little at a time.
Subtract Your Total Expenses from Your Total Income
If you have money left over, great! Put some more in savings, take yourself out to the movies or save it for your next great vacation. If not, you need to go back to the drawing board to reassess some of your expenses. You may need to lower your amounts in some areas so that your budget will balance out to zero.
Get Some Help
Financial experts abound, and tapping into some of their expertise is a smart way to go. The well-respected financial magazine Kiplinger provides a household budget worksheet that is fairly simple to use and does the math for you. Additionally, Mint, Dave Ramsey’s Every Dollar program and You Need a Budget offer online budgeting tools with apps, transaction tracking from your bank accounts and more. Even taking a class or chatting with a budget-savvy friend can encourage you to be more responsible with your finances.
After all, great benefits arise from telling your money where to go rather than wondering where it has gone.