Budgets are Important!
I’m going to share all sorts of thoughts, advice and tips on this blog with the hopes of helping as many people as I can, but at the end of the day the single most important thing you need is a budget! There are many many many ways to budget your money. Some options might work better for some people than others. Fact is that only about one third of all Americans use a budget according to a Gallup article. So, if you’re one of those people please read on and start using a budget today!
There are some great websites that will help you automate and track all of your income and expenses. Mint, Personal Capital, Budget Tracker and Budget Pulse are some of the more popular ones. You need to put in some effort at the beginning to get these sites setup, but they can be very helpful once you’re up and running. Automatically pulling transactions from your bank and credit cards makes budgeting a breeze.
I’ve tried all of the above sites and they may work well for a vast majority of you reading this. Personally, I still like a good old Excel spreadsheet. Nothing beats the customization I can get with Excel. Sign up for our email list to receive your free copy of the exact budget we’ve been using for over 10 years!
In order to create a useful budget that will keep you on a path to financial success and out of debt, you should follow some basic rules for allocating your monthly income. You’ll find varying percentage recommendations all over the internet for what you should allocate to different expenses. Below are my recommendations:
- Savings – minimum 10%
- Housing – up to 35%*
- Utilities – 5-7%
- Transportation – up to 15%
- Food and Misc. Personal Expenses – up to 25%
- Debt – up to 15%
Those are high level numbers, and obviously don’t add up to 100% because I said “up to” for a few different items. These numbers are for your take home income. So, you should be saving in your 401(k) at work. The devil is in the details…
Why is savings first? You need to pay yourself first! If you’re in a position where you can’t save 10% right now, then start with 5% and work your way up to 10% or higher if you can! This is cash savings, not what you save at work in your 401(k). That is taken out off the top before we start calculating the percentages discussed here.
I like to split savings into two categories: emergency fund and regular savings. You should make it a goal to save at least six months in an emergency fund. The other savings could be for a down payment or other large expense.
In general spending up to 35% on housing items is probably an acceptable range for most people, however, you’ll notice I placed a fancy little asterisk next to that line item only. Why? Because in certain expensive areas of the country, you probably have to stretch this past 35% if you want to be within 2 hours of where you work!
Housing expenses include rent if you’re renting and mortgage, taxes, homeowners insurance and homeowners association fees if you’re buying. Of course if you’re buying a house, the bank or credit union where you get your mortgage will have a say in how much you’re spending on your housing expenses too!
These line items should include expenses like cable or satellite, internet, cell phone, electricity and natural gas or heating oil. You have a little more control over your cable, satellite, internet and cell phone expenses than electricity and natural gas or heating oil. If you own your home and its older, you can make significant improvements to insulation, HVAC systems and ventilation that could greatly reduce your expenses.
What you spend each month on cable, satellite, internet and cell phone can vary greatly. Have you taken a step back to think about whether you’re using what you’re paying for? Can you drop down to a lower tier plan? How many channels do you consistently watch every month?
- Cable/Satellite – Do you watch all of the channels you pay for? How many channels do you really watch each month? Could you get all of those channels through other means like Hulu?
- Cell Phone – Are you always using at least 75% of the data you’re paying for each month? If not you may be able to drop down to a lower tiered plan.
- Internet – Unless you have a special need for high speeds (like gaming) then you can probably get away with the lowest internet speed your provider offers. The lowest speed offered by Xfinity is 25Mbps download which is high enough for HD streaming according to Netflix.
These expenses on your budget should include your car loan or lease, gas for your car, toll expenses, public transportation and Uber/Lyft expenses. One of the biggest expenses that people tend to overspend on is their car or truck because they fail to consider all the ancillary expenses like gas and tolls. If you’re near a city, you probably take Uber or Lyft sometimes (or all the time) as well so you should add up all of those expenses for this part of your budget too. You can sign up to ride with Uber right here.
Food and Misc Personal Expenses
This category is a bit of a catch all for most of the remaining items in your budget. Some other expenses that you might include in this category could be:
- Pet Expenses
- Life Insurance
- Charitable Contributions
This is the category you hope to never have. If you do have debt, lets make it a goal to get rid of it as quickly as possible! The most common debt (outside of a mortgage) that many people have is student loan debt. In fact student loan debt is now officially the highest debt behind housing related debt at around $1.3 trillion dollars nationwide.
If you have other debt like credit cards you should allocate all of your extra budget for this line item, after the minimum payments on student loan debt, to paying off your credit cards. I prefer the snowball method, which I’ll explain more in a later post but you basically pay off the highest interest rate debt first, then once its paid off take that money and apply it to the next highest debt until all of the debt is paid off.
How to use our Excel budget
There will be a detailed “how to” included with the excel file