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Budgeting 101
Why Do You Need A Budget?
Personal finance books all recommend that individuals and families establish a budget. But how much is recommended for housing? food? entertainment? transportation? And what happens when there isn’t enough income to pay for expenses?
Before committing to any budget, it’s useful to simply keep track of your income and spending patterns for a few months. That’s not budgeting, but it’s referred to as your financial experience. It’s what you have a tendency to do if you don’t foresee what you will earn and spend through the year. It’s often based entirely on the present: when you get paid, you pay for what you must and spend the rest quickly because you feel flush. Maybe you go out to eat, buy a new tv or treat yourself to a “reward” for your success. But before you realize it, more bills arrive, the car has a costly repair, an emergency need arises that you couldn’t have imagined, and suddenly you find you don’t have enough to do more than squeak by. Maybe you borrow from lenders, friends, or relatives. Maybe you rely on credit and take out more than you can pay back—hoping that somehow your “luck” will change or you’ll win the lottery.
Guess what. That’s probably most of us. We sort of know we’re not doing very well at managing our money or “living with what we can afford.” We see others on the media living the good life in luxurious new homes and driving hot cars and think we should be, too. We’re the ready victims of false expectations, because we can’t know what’s coming.
That’s why a budget plan of almost any kind is much better than none at all. Some young people begin with a cash envelope plan in which they create letter envelopes for the rent, the electricity, the phone, etc., and after cashing their paychecks put aside enough cash in each to be able to pay their bills that month. They may not even have a checking account, and actually walk to the phone company office and pay cash. Or they use the cash to buy money orders and send those.
Finally they get a checking account and begin to get a little bit of control.. If they maintain their checkbook register, they can see their deposits and payments in some clarity, and the monthly statement from the bank confirms their numbers. Today with more people paying bills online and keeping track of their bank and credit card balances through online sites, their view of their finances is vastly more current than waiting for the bank statement. In other words, they can more clearly visualize their financial experience and avoid upsetting surprises.
But still problems persist, because their vision is still shortsighted and based only on present experience and memory. They can’t foresee what will likely happen in a year or even by the end of the month if they make some purchase or pay off some loan. That’s why they need a budget, so they can adapt to their means and know what they can afford and when. Planning a realistic budget and updating it regularly for actual experience enables them to quit dodging bullets of current experience alone and begin to plan ahead.
So just tracking your spending habits is a good place to start, and if you wish you can do only that on your new Pageamonth spreadsheet for a year and see how you fare. It will tell you where your money came from and where it went. But then what? Maybe your end-of-month balance for August was always a deficit, such as teachers often face if they don’t get paychecks over the summer. This spreadsheet will warn the user that’s coming, and knowing that’s coming is the most powerful incentive I know to doing something to adjust other spending and earning to make sure it doesn’t happen, that even if you spend up to the amount you budget for that July vacation trip, you’ll still have a healthy “buffer” to get you through August and into your regular paychecks again in September. You know they’re coming because you have your contract. It’s just a matter of budgeting your money till you get paid again.
But let’s assume you have a reasonably regular job and your spouse works, and you’re trying to support a growing family. You live in an apartment, condo, or house and pay monthly rent or a mortgage, have a phone and probably a cellphone as well, a credit card or two, are paying off at least one car loan and perhaps some other debts. You try to eat out once a week at least and take in a movie or show, and try to get away from it all with an annual vacation trip. You’d like to save but although you have a savings account you don’t contribute to it regularly. You’d like to retire someday but are hoping Social Security plus your company retirement account will be enough. If not, you’ll keep on working you guess. There’s no plan B.
Lots of adults fit this profile.
How much should you budget for what?
Some credit agencies and financial advisors suggest you break down your expenses according to the following general percentages of your discretionary income (net income after deductions): To the right I’ve included the Pageamonth suggested categories in our sample pages.
Housing and utilities 25% 101-106 mtg./rent, electric, water, phone, cable tv
Food 15% 110 cash
Clothing 5% 125/135 clothing
Medical 5% 121/131 medical
Transportation 15% 107-109 car pmt, ins, gas, 126/136 repairs
Savings 5% 112 savings
Debt payments 15% 111 credit cards, installment loans
Other 15% 120/130 misc.
How Fixed Are These Recommendations?
Not fixed at all. Everyone’s situation is different, and everyone has different goals and needs. Some need to save for college or to buy a house. Others plan a move or career change. Families with growing children may need much more for nursery, clothing, and school supplies. Some need more funds to invest. The differences are as great as the number of people. You shouldn’t view these recommendations as what you should be doing but as general guidelines credit counselors and financial advisors might expect to find.
However, if you’re spending more than 20% on installment loans, for example, it might need to change because you’re likely paying a lot of unnecessary interest. See if you could wait to buy that new couch or entertainment center, or find a good used car instead of a new one.
People typically also spend too much on credit cards; if you can consolidate them at a lower interest rate, do it. If there’s any way you can pay off your car loan or any installment loans, do it. But use your budget to see what you’re spending and for what each month, and consider these percentages many people recommend. If you’re way out of line—spending over half your resources to live in a place you can’t afford, for example—consider ways to cut back. You can adjust your Pageamonth budget categories and amounts to suit your particular needs and goals with more confidence than just guessing "what would happen if--?"
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