Budgeting Basics

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Hi guys! I wanted to do something a little different today and give you a tool that you can use to help customize your budget. It’s nothing fancy, but it works for me. You know how much money is coming in, and by now, you should know how much money is going out. Let’s start telling it where to go instead of wondering where it went.

A lot of the budgeting apps and tools out there will look at a month’s worth of income and expenses at a time. I prefer to budget biweekly, so I struggled with using a few different apps for a little while. Eventually, I gave up and went back to my old faithful – an Excel spreadsheet. I love crunching data, so if we’re being honest, I was all too happy to go back to Excel. I did find another app that’s pretty decent and have been using it for about three months now, but I always start with getting everything in order in Excel first. It’s a little more time consuming at first, but it works great for me and it helps me keep my information accurate. If you’re interested in using an app, I recommend researching a few different ones and reading through the reviews before testing it out. Don’t be afraid to test a few different ones before committing. Also, some of the free apps are quite good. You don’t always have to pay a fee to get a good product.

So, let’s look at a baseline budget. I believe in tithing, and I do this with my own income. So, I’m going to include that, but you can customize this however you want.

For our example, let’s say that your net income or take-home pay is $2,500 per month.

CATEGORYAMOUNTPERCENTAGE
Tithe$25010%
Recurring Bills$1,25050%
Savings$25010%
Spending$75030%
Basic Budget: Divide the amount by the net monthly income to figure out the percentage. (Recurring Bills: $1250 / $2500 x 100% = 50%)

This baseline is what I used to build my own budget, and it’s worked very well for me.

The rule of thumb, no matter what you make, is that your recurring bills should not be costing more than half of what you bring home. Your recurring expenses are your regular monthly bills including rent or mortgage, but in my opinion, they are also your regular bimonthly, semiannual, quarterly, and annual bills. If it comes at regular intervals, no matter what the frequency is, it should be included in this category. For example, I also include vehicle maintenance in this category. If you have a vehicle, no matter if it’s brand new or 10 years old, you know that you’ll be doing regular oil changes throughout the year at minimum as maintenance. You can (and should) factor that cost into your budget. For all of my ‘non-monthly’ recurring bills (vehicle maintenance, car insurance, flood insurance, pest control, HOA dues, etc.), I add up what the total cost would be at the end of one year, divide by 12, and set that amount aside every month as part of my recurring bills category. Then, when the bill comes due, I’ll pay it out of the money I’ve already set aside.

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The savings category is going to be a little different depending on what your situation is. Whether you have consumer debt or not, focus on at least saving about $1,000 so that you can cover small emergencies if they come up. If you need to use it, replenish it. Try to always keep at least $1,000 saved.

If you have consumer debt, like credit cards or student loans, you should be including that payment into your recurring bills category, and also working to pay them off quickly. Once your $1,000 is saved, focus on paying off the debt rather than adding more to your savings – for now. Remember, you’re not building wealth as long as you’re constantly owing someone else. There are a few opinions on the best way to do this. The avalanche method and the snowball method are probably the most common. The main difference between the two is the way that you pick which debt to send extra payments to – either based on the highest interest rate (avalanche) or the remaining balance (snowball). With the debt avalanche, you make your regular minimum monthly payments to all of your debts, then focus on sending extra money to the principal balance of the debt with the highest interest rate until it’s paid off. You then take all of that money – the amount of the minimum payment plus extra that was being sent to pay that debt off – and add it to the minimum payment that you send to the debt with the next highest interest rate until that’s paid off and so on. With the debt snowball, you take the same approach of sending the minimum monthly payment to all debts then focus on sending any extra money you can to the debt with the lowest balance. Once that’s paid off, take all of that money – minimum payment plus extra to principal – and add it to the minimum payment that you send to the debt with the next highest balance. Different ways to attack the same problem, but the takeaway is that they both attack the problem. Do your own research, and do what’s best for you. Once your consumer debt is paid off, whether via snowball or avalanche, continue setting all of that money aside and save to build up your emergency fund.

If you don’t have any consumer debt, save at least 10% of what you bring in (more if you can) until your emergency fund is fully funded. Now, I did not stop setting that money aside once my emergency fund was fully funded, and you don’t have to either. It’s completely up to you. But, I do recommend you start doing more with it than just putting it into a bank account. You could use that money to add to your retirement, invest, send extra principal to your mortgage balance, save for your children’s college funds… I do all of the above.

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Now, for everyone’s favorite category – spending. I really struggled with this one for a while because for a long time, I wasn’t sure how much I should reasonably be spending. The truth is, you may need to play with this one for a few months until you figure out what ‘reasonable’ is for you. The sweet spot though is where you’re stretching yourself just a little bit. This can be scary at first, at least it was for me. How I managed to make it work was to pay attention to where the bulk of my money was going after the bills were paid. For me, this was food. Eating out less often helped with this, but I also did some research on what a good budget for groceries looks like. Again, I had to play around with the numbers for a few months, and this is going to vary depending on the cost of living where you live. A reasonable grocery budget (including household supplies) that stretches me a little bit but is still doable, is about $100 per week. Sometimes, I can make it happen with less and sometimes I need to add a little more to it depending on what we need around the house. On a regular basis though, I set aside $100 per week for groceries and household supplies. Using the example of a net income of $2,500 per month (and some rough simple math) that would leave about $350 a month for gas, clothes, shoes, entertainment and whatever else I wanted to get or do. If the grocery side of this category needs a little bit more, I pull from this ‘miscellaneous’ side of my spending budget to cover it. NEVER ‘borrow’ from the next week to make your budget work. Move money around within the spending budget already in play instead.

Feel free to move the budget percentages around however you need to as long as you leave the recurring bills budget alone. You should never be spending more than half of what you make on your recurring bills. If the percentages are a little off for you right now, look at what can be cut like Netflix or cable or Starbucks (all of that adds up!) or try to add to your income – second job, overtime, odd jobs for neighbors, sell things you no longer need, etc. And for the spending category, again, don’t be afraid to stretch yourself a little bit. Maybe you can make this work with 20% rather than 30% and send that extra money toward paying your mortgage down even faster or setting it aside in a sinking fund for something you have coming up or want to do later in the year. The beauty of a budget is the customization and the purpose it gives to every single dollar. Like I’ve said before, the road to financial freedom is a marathon, not a sprint. Establishing and following a good budget will help you reach the finish line.

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