Are you tired of looking at single digits in your bank account? Irritated that you can’t afford anything with your hard-earned money? Find yourself using credit cards, just to make ends meet? Let’s talk about one of the most valuable tools for this situation. A budget. So how do you make a budget?
The truth is, budgets are hard. We spend hours of our time feeling smart about numbers and spreadsheets. Blah blah blah. Afterwards, not many of us actually end up sticking to the budget. Following a budget can be a lot more about your mentality, and how you think rather than how it is about the numbers and math. Dave Ramsey summarizes this well by saying, “Personal finance is 80% behavior and 20% head knowledge.”
Almost 75% of Americans in a study acknowledged that they did a monthly budget. Approximately 80% of these same people studied reported that they failed to actually stick with their budget. This is not surprising given the information in my previous paragraph. It takes a lot to make a budget, follow it throughout the month, and to make each conscious decision at the store not to buy something (out of budget).
Let’s Budget
Let’s look at some budget numbers:
First, you need to know your bring home monthly income (after taxes, what you actually have to spend).
- Monthly Income (to be allotted in budget) = 100% of your total
Here are some recommended budget percentages, that will work for you no matter what your income is. There are plenty of other things that can be budgeting for, but what I have listed are the most critical categories.
- Retirement (401k, Roth IRA) = 5-10%
- Saving (sinking savings, big purchases) = 10%
- Housing (rent, mortgage) = 20-30%
- Utilities (power, water, gas, sewer, garbage) = 5-10%
- Transportation (car maintenance, gas, public transportation) = 5-10%
- Food (groceries, this does not include eating out) = 10-15%
- Health (doctor appointments, medicine) = 5-10%
- Insurance (home, car, health) = 5-15%
- Personal Spending (personal improvement, education, hobby) = 5-10%
- Entertainment (eating out, movies, dates) = 5-10%
- Miscellaneous (things not budgeted for, but randomly needed) = 5-10%
Total = Should always equal 100%
I also like to mention that giving (tithing to church, giving to charity, helping someone to buy food, acts of kindness, etc.) are always wonderful things to learn as well. If you can include this into your budget, that is definitely recommended for anyone’s situation. Giving will teach you to be more selfless, and will allow you to become a better person, in every aspect of life. It’s one tuning fork that can help teach you how to take care of others and form community.
For clarity, I will provide an example budget below to help you understand this process and what it looks like. Sometimes the numbers aren’t exactly 5 or 10%, and you might have to go in between these numbers. Again, these are recommendations and not what you HAVE to live by. Everyone’s situation is different, and if you have a smaller house, or credit card debt, or car payments, etc. then your budget will likely be much different.
| Income (100%) | $3500 |
| Retirement (6.5%) | $230 |
| Savings (10%) | $350 |
| Housing (28%) | $1000 |
| Utilities (8.5%) | $300 |
| Transportation (3.5%) | $120 |
| Food (10%) | $320 |
| Health (5%) | $160 |
| Insurance (6.5%) | $320 |
| Personal Spending (7.5%) | $270 |
| Entertainment (7.5%) | $270 |
| Miscellaneous (5%) | $160 |
| Total (100%) | $3500 |
The Danger of Debt
All across the financial industry, you’ll find a million different arguments about debt. If you follow Dave Ramsey, you’ll see he’s the no-debt guy. If you have read Rich Dad Poor Dad by Robert Kiyosaki, he is all about making money by borrowing OPM (other people’s money).
I’m not going to stand on either side of this debate today, but I will give some sound logic about debt below. Debt can be quite a heavy weight for most people.
- Debt can be a tool to allow you to get something quicker than you can with your money/income. We all might want things quicker than we can pay for it.
- You will pay a significant amount more for the product when financed. If you get a car loan of $22,999 financed at 5% interest for a term of 72 months, you’ll end up paying close to $28,300 in total over the loan. An extra $5,299 more than it should of cost originally. This is what debt was designed to do.
- Debt can be used quickly for bad. If you have a spending problem, having credit cards and store cards will quickly allow you to rack up debt. In the amounts higher than you can even imagine. And the credit card companies will gladly keep lending you money. Because they know they’ve got you.
- Airline miles and cash back points for credit card spending is useful, although they are used as a game for marketing. They know these reward offers will entice people into opening the credit card, then bank (funny pun) on you going into debt with them. This eventually results in paying them back more than the rewards they will ever give you.
- Interest rates on most credit cards is between 18-25% even with good credit. These companies don’t play, and they want your money. Never let your credit card bill be past due, to avoid hefty interest.
- Saving up your own cash instead of spending on a credit card can feel more rewarding. You not only practice patience, but you give yourself a reason to work so hard for something and experience delayed gratitude… a term that most of our society doesn’t comprehend now-a-days.
- Having one form of debt will make you feel like other forms of debt are acceptable. Example: Having a car payment will eventually make you think that having a credit card is a smart idea too, because you can afford the payments for that also, right?
- Just because you can afford the payments, doesn’t mean that you can actually afford the risk of interest and the totality of the loan down the road. Sometimes this logic is hurtful, and don’t let yourself justify it.
- If you are buying something on credit (TV, clothes, etc.) there is a good chance that it’s something that you don’t actually need. Avoid impulse spending and buying things that you can’t afford.
- Creating a budget is incredibly difficult when you have debt and credit card payments. It’s hard to track multiple purchases throughout multiple banks and app interfaces. Debt can quickly put you overbudget without even realizing it.
That concludes your morning read for the day. Hopefully, this has given you insight towards how to better keep track of your money like a pro. Please share this blog with all of those people you know who struggle with money!
No Place Like Gone 