The most important aspect of financial growth and prosperity is budgeting. This section will focus on the important aspects of the budget, and how to properly put a budget together. This is based off of Dave Ramsey’s Budgeting forms and tools, and those can be found here. Having a written budget in place allows you to plan your month and year ahead, and allows you to allocate properly to your expenses.
The following is based off of my budget, and what has worked well for me through this year. As a Christian, I decided to make it a point to begin tithing this year, and thus as a priority, it has swept to the top of my budget. I am not saying that you must tithe, and I am not even saying that you must donate to your church, ministry or place of worship. I have however, found that since I have started tithing that God has bestowed upon me wealth that I was not expecting this year, and to that I am grateful. Also please note that the recommended percentages are strictly that, recommendations. If you make $20,000, your percentages may be extremely off for items such as food, housing and the likes if you have a larger family. If you make $250,000, you may not want to spend close to $40,000 on food! Also, not every item that you may put in your budget will be listed in these sub-categories, so make sure that you’re properly budgeting and added any items in the proper categories that are in Bold. Please keep this in mind, and you can email me with any questions that I may be able to help with on the budget. Now, onto the budget!
Here it is important to list all of the income that you receive in the month. Without knowing how much money is coming in, it will be extremely difficult to figure out how much money you are able to spend before it is all gone. Income sources can be as follows: paycheck (weekly, bi-weekly, monthly), side job income, rental income, annuities, child support, tax refunds, etc. Also note when you will be receiving these incomes, such as the first and third week of the month, my paychecks arrive. This way, it is easier when you are putting the rest of your budget together, you know which portion of your income will be allocated to paying off that specific payment on or before its due date.
This is the fun portion of the budget. You can take anywhere from 15 minutes working out a quick and simple budget to get started, or you can be like me and take upwards of a couple hours the first couple months, tweaking all of these and worrying about which “bucket” is over/under funded. Here we will outline a simple budget, and later will revisit in a post to go over a few more in depth items. You can also visit various sites online for some helpful tools and budgeting software. Again, I use Dave Ramsey’s budgeting tools, but choose a tool that is easy for you to use and understand.
- Giving: Here is where I tithe, and also set aside money for various charities or donations, such as Sheldon Calvary Camp, my Alma mater St. Vincent College, and various charities that come up throughout the year. A general recommendation is 5-15% of your income.
- Saving: This is where you PAY YOURSELF! In order to get ahead of the game, it is vital that you pay yourself savings to build up an emergency fund, retirement fund, kid’s college fund, whatever longer term investing/savings you wish to accomplish. Again, if it is not at the top of the budget, you will not make it a priority. We will get into the retirement and college fund savings later, but in general, you should be saving 5-15% of your income. This is also the portion where you can utilize your sinking fund to build up a small savings account to make large purchases with cash.
- Housing: This is where you mortgage, rent, property taxes (monthly, quarterly or yearly) should be deducted. A good basis is somewhere between 25-35% of income, but I highly recommend this not exceed 35%.
- Utilities: Electricity, heating/air, water, sewage, phone, cable, internet, etc. This portion of the budget can vary widely, as your needs and ability to have some items does not fit the needs of your neighbor, brother, mother or friend. It used to be my rent includes heating, water and sewage, so I am only paying for electricity, phone, and internet, however I did just buy a house. My mortgage payment includes an escrow for insurance and taxes, along with my principal payment, but I will have to cover my electricity, water, sewage, internet and heating oil. Be smart about what utilities are needs (shelter, water, heat, electricity…), and which are wants (cable, internet). Recommended 5-10%
- Food: This portion is primarily for the grocery budget. Feeding a single male will have a drastically different food budget as opposed to feeding a family of 4 with 2 young children. Also, if you plan on eating out, budget what you are willing to spend on eating out for that month as well in a “restaurant” or “going-out” portion of your food budget. Also, if you have pets, they need to eat too! We have a small portion of our budget set aside monthly for our cat, Stella. This part of your budget (most volatile depending on your family and situation) should be somewhere between 5-15% of your income.
- Transportation: This category can also change drastically depending on your situation. If you strictly pedal bike to work, you may not have much of a transportation budget. If you walk, you may not have any. Live in a city? You may take public transportation everywhere and get a monthly/yearly pass to use buses or trains. If you’re like me though, you probably have a car, and commute some distance to and from work every day, along with your extra activities. The transportation part of your budget should include any expenses for that month to get you from point A to point B. These include: car payment (if any), insurance, gas, oil changes, tolls, car repair (build up a sinking fund), registration, inspection, any other items for your car/truck, bus/train passes, new bike items (tires, pedals, wheels, safety equipment) or anything else that I may have missed. Recommended 10-15% of your income. Please note, if you are going to have a car payment (Dave Ramsey recommends not to and here’s why) DO NOT over extend yourself and get a car that you cannot afford. Cars (along with toys such as ATV’s, boats, motorcycles) are the largest items that we purchase that depreciate in value like a large rock thrown into the ocean. Paying a larger portion than 15% of your income on a car payment monthly is disastrous. It will wreck your budget, cause you to worry about the rest of your finances, and possibly cause some money fights in your household. If you have a dream car in mind, you can get it eventually, but save up and pay for it with cash.
- Clothing: This category is for all clothing for the family. For a family with growing children, this portion of the budget will probably need to be deposited into regularly, because children have a way of growing out of clothes. A nifty tip to save some money on growing kids is in consignment shops, thrift stores, and garage sales. A growing trend through the Great Recession is that the younger generations are finding more and more value in saving money, and better items at places such as these. For someone like me though, I update my budget twice a year, and only budget in those months. Recommended percentages of 2-7%.
- Medical/Health: Doctor visits, dentists, yearly check-ups, optometrist (eye-doctor), counseling, veterinarian for our pets, there are always costs associate with keeping our bodies and minds lean and fighting-fit. These may amount to very little in a year for someone healthy, but can be costly for a family with sick children, or a family that may have a member going through a difficult situation such as treatable cancer. It is important to properly budget out for all of the known appointments, and when emergency strikes such as a broken bone, that is when you can dip into the emergency fund. Recommended percentages of 5-10%.
- Personal: These are for items that you may require that don’t fit nicely in any of the other categories. Some of these items include gifts (let me give you a heads up, Christmas falls on December 25th this year, so start budgeting accordingly!), toiletries, subscriptions, “Fun” money for going out with friends or family, etc. Recommended percentages of 5-10%.
- Recreational: This is a big one, because vacationing is recreational. Make sure that you budget properly for any vacations/staycations that you have coming up, and put money aside each month. You can set up a separate budget for when you actually go on vacation too, following these basic steps outlined above. This spot is also for any sports that you/your family may participate in, recreational leagues, seasonal activities such as skiing for the winter or golf in the summer, etc. Recommended percentages of 5-10%.
- Debts: I recommend using Dave Ramsey’s Debt Snowball method for reducing debts. All debts are in here that do not fit elsewhere, such as credit card debts, student loans, personal loan, home equity loan, etc. It is important to be making at least the minimum required payments on each of your debts, and we will further discuss the Debt Snowball tool to help reduce all of your debts to really increase your wealth maximizing potential. Recommended percentages of 5-10%.
There is the basic budget that I do every single month. I make sure to schedule out my budget prior to the start of the month, and also keep track of my monthly expenses in a spreadsheet to see how effectively my budgeting is working, and my yearly totals.
Question: Do you currently budget, why or why not? If you do not budget, did you find this helpful? What is holding you back from budgeting every single month?