A budget is simply a written plan which explains how every dollar you earn will be used. Each dollar is given a job. Tracking expenses is simply keeping a record of the money you spent and not necessarily in relation to the money you actually have. Many people track expenses in their head. These are the people who get paid on Friday, knowing they have rent to pay on Monday but want to have a good time out on Saturday and spend their check up to the amount they need for rent on Monday. They completely forget to set aside money for food and utilities. Hopefully your case is not that extreme but I have seen exactly that play out for people.
Budget is a Scary Word
Some people are afraid of the word budget because to them it means restriction and not being able to buy the advertised products that they so falsely desire. In reality a budget is a plan which empowers you to buy those desires in time. Delayed gratification is a huge factor in building a budget. Believe it or not budgeting can be fun. A budget can get you to a place where you are buying product B without credit and without worry of paying for anything else that month.
The Basics
Let’s look at a basic budget starting with income. Assuming you are working full time without overtime, you should budget based upon your base rate.
Note: While overtime pay may be the norm for you, please remember that it may not always be there and therefore if you factor that in as your base rate, you will struggle when it goes away.
Typical budget categories which may or may not apply to you are:
- Rent: This is your rent or mortgage
- Tithe: 10% to your local church/congregation if you are a member of a church.
- Home Insurance: Renter’s or home owners insurance.
- Electricity
- Heat
- Internet
- Mobile Phone
- Groceries: Just food items.
- Personal Care: Haircuts, massages, nails,
- Healthcare: Medications, co-pays, eye glasses, dental care.
- Clothes: Clothing, shoes, accessories such as watches, sunglasses, etc.
- Auto Insurance
- Car Fuel
- Roadside Assistance
- Household Goods: This is for toilet paper, tooth paste, picture hangers, etc.
- Spending Money: This is for any discretionary spending you may make. This would also include going out with friends.
- Savings: General savings for anything large and not budgeted for.
- Emergency Fund: This is saving towards 3-6 months of expenses.
- Travel
- Gifts: Gifts for birthdays, anniversaries, or holidays.
- Streaming Media: Any streaming media service.
If you have never made a budget before there are a few things to remember.
- Deductions: Your hourly wage multiplied by your hours does not equate to your net (take home) pay. You will need to account for your average deductions. These deductions could include:
- Federal, state, and local taxes
- Workman’s Compensation
- SSI
- Health Insurance
- Pay your rent/mortgage, utilities, and food first. Savings, emergency funds, and nice to haves such as streaming media services are not primary.
- Base your income and expenses on a monthly schedule.
- You are trying to get to a place in your finances where this month’s money is paying for next month’s bills.
Budgeting 101
Our budgeting spreadsheet can help you project your actual needs. In our example we will assume our consumer is named Joe. Joe earns an hourly wage of $20 for 40 hours a week. His income breaks down like this.
Gross Montly Income: $3,466.67
Deduction Rate: 25%
Net Monthly Income: $2,600.00
Net Yearly Income: $31,200.00
We are going to assume that Joe is single and living alone or perhaps splitting rent with a roommate. All of Joe’s expenses are his own or his share.
| Monthly Amt | Annual Amt | Net Pct | Gross Pct | |
|---|---|---|---|---|
| Rent | $1,100.00 | $13,200.00 | 42.31% | 31.73% |
| Tithe | $0.00 | $0.00 | 0.00% | 0.00% |
| Home Insurance | $25.00 | $300.00 | 0.96% | 0.72% |
| Electricity | $50.00 | $600.00 | 1.92% | 1.44% |
| Heat (Oil or Gas) | $50.00 | $600.00 | 1.92% | 1.44% |
| Internet | $60.00 | $720.00 | 2.31% | 1.73% |
| Mobile Phone | $80.00 | $960.00 | 3.08% | 2.31% |
| Groceries | $450.00 | $5,400.00 | 17.31% | 12.98% |
| Personal Care | $50.00 | $600.00 | 1.92% | 1.44% |
| Healthcare | $50.00 | $600.00 | 1.92% | 1.44% |
| Clothes | $60.00 | $720.00 | 2.31% | 1.73% |
| Auto Insurance | $100.00 | $1,200.00 | 3.85% | 2.88% |
| Car Fuel | $200.00 | $2,400.00 | 7.69% | 5.77% |
| Roadside Assistance | $0.00 | $0.00 | 0.00% | 0.00% |
| Household Goods | $100.00 | $1,200.00 | 3.85% | 2.88% |
| Spending Money | $50.00 | $600.00 | 1.92% | 1.44% |
| Savings | $75.00 | $900.00 | 2.88% | 2.16% |
| Emergency Fund | $80.00 | $960.00 | 3.08% | 2.31% |
| Travel | $0.00 | $0.00 | 0.00% | 0.00% |
| Gifts | $0.00 | $0.00 | 0.00% | 0.00% |
| Streaming Media | $20.00 | $240.00 | 0.77% | 0.58% |
| Line Item 1 | $0.00 | $0.00 | 0.00% | 0.00% |
| Line Item 2 | $0.00 | $0.00 | 0.00% | 0.00% |
| Line Item 3 | $0.00 | $0.00 | 0.00% | 0.00% |
| Line Item 4 | $0.00 | $0.00 | 0.00% | 0.00% |
| Line Item 5 | $0.00 | $0.00 | 0.00% | 0.00% |
| Line Item 6 | $0.00 | $0.00 | 0.00% | 0.00% |
| Line Item 7 | $0.00 | $0.00 | 0.00% | 0.00% |
| Line Item 8 | $0.00 | $0.00 | 0.00% | 0.00% |
| Left | $0.00 | 0.00% |
Joe is clearly not living a luxurious life. But he may be able to save some money in some areas.
A Word on Savings
In our above example Joe is able to save $900 a year for general savings and $960 a year towards an emergency fund which is great, but at that rate it will take him 8 years to reach 3 months of expenses. That’s a long time. This is a situation which many people are in. The trick here is to divert funds from another areas to this area in order to build that funding.
Joe’s cell phone bill of $80 is typical for a line from a major carrier. However, if Joe switched him service to a MNVO (mobile network virtual operator) such as Mint Mobile, Ting, or others, he could save as much as $65 a month or $780 a year. That money could be redirected into his savings. And while it may not greatly reduce the time to reach his goal of three month’s expenses, it will still have an impact. The $780 savings Joe could realize from his cell phone bill could actually cover his Internet bill.
Playing with the Numbers
Consider the amounts you pay out each month may fluctuate a bit from month to month. You will need to pay attention and consider the average you are paying out after each month comes to a close. You may discover that you have allotted too much to a particular line and not enough to another. In which case you can move some dollar around the next month.
Sacrificing Today for Tomorrow
The words money and sacrificing are two words no one really wants to hear. The truth is that when we sacrifice our spending in an area for a time we can really profit in another area. Perhaps giving up streaming media for a couple of months or a year will feel difficult, but it could also cause you to get out of the house and spend time with friends instead. Maybe you watch a favorite show with a friend instead or get DVDs from the library, or find a Youtube Channel which has decent content.
You will need to set and determine your goals. Perhaps saving $10 a month on streaming media won’t give you the impact you need to reach your goals. But if that money is invested into a dividend paying stock, it could add up to a bit more.
Conclusion
A budget is not a dirty word but rather a tool to give every dollar a job. It is one tool to use toward building wealth. Building wealth is a slow process. The earlier you start, the better you will do. It si time to build a better relationship with your money and start building your wealth.
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