|Image courtesy of Stuart Miles at FreeDigitalPhotos.net|
Fine. I'll admit it - that post title was a shameless attempt to make this post seem exciting. I know the second I say the word "budget", your attention drifts to the show you're binge watching on Netflix, S'Mores Oreos, and...uh...mmmm...S'Mores Oreos...
Apparently mine does, too.
I can't tell you how many times I've tuned out my husband when he's mentioned our budget. (Sorry, love!) It's not that I don't want to budget, because I do. In fact, I'm pretty good at sticking to ours most of the time. I just don't like being reminded of what I already know.
I know that to create a budget, you first need to determine your total net income. Net income is what you bring home after taxes and everything else has been taken out of your paycheck.
Let's play with some real numbers and create a budget for an imaginary family. According to the US Census, the median annual household income in 2013 was $51,939. We're going to use an annual net income of $48,000 to keep the math easy. Since bills and paychecks usually don't come yearly, let's break this down into monthly rather than annually. That leaves us with $4,000 a month net income.
Ideally, that number is after you've taken out money for retirement, company-provided healthcare, and all that jazz. But since I'm not an expert on that side of things, I'll direct you to a financial adviser if you want to learn more. This is a basic intro to creating a budget. That's it.
Once you've determined your total net income, you need to list all necessary expenses. Yes, I emphasized the word 'necessary'. This is where you need to be honest with yourself. Do you really need satellite tv? Or a smart phone? Nope. The only things you need are a place to live, utilities, transportation to and from work and school, clothing, and food.
According to Dave Ramsey, financial expert, your monthly mortgage payment should be 25% or less of your monthly take-home pay. We'll pretend we were good homebuyers and stuck to the 25% mark, so our monthly mortgage payment is $1000.
Utilities vary so much, depending on age and energy efficiency of home, that it's nearly impossible to come up with a recommended percentage you should pay for your home. For example, our last house was smaller than our current house. It was also built fifteen years ago, while our current house is brand new. That smaller, older house had higher utility bills than the bigger, newer house. Climate, personal temperature preference, time of year, appliances used, how often your kids leave the doors open...it all affects what you'll pay. For the purposes of our example, we're going to assume an average of $200 a month in utilities, which includes water, sewer, gas, and electric. Use previous utility statements from the past year to determine what your average payment is.
Other necessary items include car payments (although many financial experts recommend paying cash for all vehicle purchases), insurance, gas, and grocery. Our pretend family here has been pretty okay about not going overboard on spending and have pretty decent driving records, so we'll keep the payments reasonable.
Before you get all huffy about have a $400 monthly budget for groceries, let me assure you it is possible. In fact, that's my budget for a family of five and I stick to it most weeks. Several of my friends with even larger families do quite well on the same budget. I'll explain more about that in my Savvy Spending post next week.
The other numbers are completely made up, but reflect what we've paid in the past. Again, these vary by family, region, and circumstance.
Notice I haven't included things like internet and cell phone bills. That was on purpose. Those are wants, not needs. You can have a simple home phone or even cell phone for less than $30 a month, if not less. Internet is available at the library or anywhere with a WiFi hotspot. Your family can even survive without satellite tv, if necessary. Yes, you can. Seriously.
So far, our fictional family is paying $2,200 a month for their necessities. That's not too shabby. Plenty of wiggle room there. Next, we'll include things like savings, debt from credit cards and student loans, and charitable gifts.
This assumes 10% going to savings and charitable donations (tithing, charities, etc.). Ideally, the revolving debt wouldn't exist, but most Americans have some degree of credit card debt or student loans they're paying off, so I included it. The important thing here is to be completely honest. Don't fudge the numbers because the only one you're cheating is yourself.
Did you notice savings doesn't fall into the Wants category? That's because building up your savings is a huge priority. If you're going to cut something out of your budget, savings should always be one of the last things to go.
We're now up to $3,200 in expenses. Wow. That added up fast. And we haven't even talked about wants.
This is where it gets tough. Now to fill in everything else. Where to start?
Let's determine what's most important. Here's a list of my top wants.
- Internet - as a writer and blogger, internet is a top priority for me.
- Cell phone - with my back problems, my phone is rarely more than arm's reach away from me. I do currently have a smart phone, but that's a splurge. I could easily make do with a basic phone, if necessary.
- Recreational - this includes going out to eat and personal spending. Clothes, toys, movies, and family outings all fit into this category as well as anything I buy from the bazillion home parties I'm invited to. (No, I don't need more makeup, kitchen items, or cleaning supplies. I'm good for now, thanks.)
- Allowance - I don't base allowance on how many chores my kids do. Chores are expected. Allowance is a learning tool. It's also less than what they want. If they want to have enough money to buy that brand new video game, they have to either find a way to earn more money or save it up.
Total expenditures each month are now up to...hold on while I grab my calculator because I don't do math in my head...$3,500.
Huh. My fictional family is doing pretty darn well. If you have extra money left over after including your top priority wants, good for you! You can add things like tv, membership to a gym, yodeling classes, or whatever else floats your boat. If not (and I'm guessing this is where most people fit), it's time to start trimming the fat.
Let's say that my fictional family has $600 in car payments and an additional $200/month in debt. Now their budget sheet looks more like this:
Total spending is now $4,100. That's $100 more than the total monthly income. Not good. Where can we cut?
First thing - we don't stop paying the necessary expenses. Nor do we stop paying savings or debt payments. Because I'm firm believer in paying a full tithe to my church, eliminating the charitable donation is not an option, either. I've seen too many people stop paying rent or mortgage payments when things get tight, but they're still carrying smart phones and going out for movies. They lose their home, but they can still play games on their phone while sitting in their car in the Walmart parking lot. There's a reason housing is under the Necessary Expenses category. Don't do it. Just don't.
Looking at our budget, I can see a couple of things we can change to get us back on track. That cell phone bill is kind of high. Dropping down to a lower plan or even switching from smart phones can potentially halve your bill.
We're now down to just $40 over budget. We have a choice here. We can make incremental cuts to recreational and allowance, but that keeps us right on the cusp of going over our budget again. If a bill or payment goes up unexpectedly, we could be in trouble. What I'm noticing is that car payment. Do we really need a car nice enough to warrant that payment? Or can we trade in for something more affordable? Just dropping the payment by $100 would give a little wiggle room. Instead of being $40 over, we'd be $60 under and we can apply that extra money we're saving to our debts to get them paid off more quickly.
It's basic math. If you spend more than you make, your debt will increase. If you spend less than you make, you have money left over that you can use to chase your dreams or go completely overboard in the chocolate store in the mall.
Not that I would ever do that.
I'm going to leave you with a few more budgeting tips I've learned over the years.
- Create the budget as a family. Include the kids so they understand money doesn't magically appear in their grubby hands for toys and treats. Talk about sacrifices you're making to make a better life for your family.
- Make goals. It's easier to stick to a budget if you have something to look forward to. Plan a family vacation. All the money you have left over at the end of the month goes into the vacation fund. The more money you have left over, the better the trip. Or make a plan to be debt free. Or save up for a new house. Chase your dreams!
- Don't completely deprive yourself. Even if all you can afford is $20 a month for recreational spending, make sure you include it. Reward yourself for sticking to your budget. If you stay under your grocery budget, use the extra money to go out to eat or treat your family to a (cheap!) movie night.
- Plan ahead. I'm talking about long-term savings, emergency savings, and retirement. There are tons of resources for learning more about it. I'm lucky to be married to a guy who works in finance, so he takes care of that for our family.
- Spend wisely. Prioritize your spending. Brand name or store brand? Movie theater or Redbox? High end salon or neighborhood barber? New clothes or second hand? Use coupons. Take advantage of sales. Groupon. There are dozens of ways to spend less money without sacrificing quality of life.
- Reassess your budget monthly. It shouldn't take more than a few minutes once a month to keep it up. If you can't seem to do it monthly, make it a yearly thing. Whatever you do, keep it current and in line with your needs.
If this were a movie, I would throw in a love scene here with two people gazing blissfully into each others' eyes and saying, "Yes, my love. We can budget together!" Follow up with the camera panning off into the distance and credits rolling up the screen.
Maybe I can pretend that's what's happening when my husband starts speaking spending.
"Yes, dear. We can stay within budget and live happily ever after!"
*Disclaimer: I am not a financial expert, nor do I claim to be one. But I know what's worked for us. I'm simply sharing what I know. Don't yell at me. Please.