As people who are very frugal and very much excited by the idea of updating and maintaining our budget, we often hear people make comments: “oh, I could never keep a budget!” OH REALLY? You could never keep a budget? Never? We think this is just an excuse and in fact, it is very easy to do (see below for online help resources too). When people say “I could never keep a budget” what they really mean is “I just don’t want to keep a budget,” or “I’m afraid to see how bad of a hole I’ve dug for myself so I refuse to budget,” or “I’ll only live once and a budget will get in the way of my fleeting materialistic wants.” OK very few people probably would think that last one, but it is what they are doing, whether they admit it or not. But only 32% of Americans even keep a budget, don’t be the ⅔ of the population that lives in the dark.
So for everyone who is afraid or in denial, here are the basics of how to budget and why you should absolutely have one:
First, the benefit: When you have a budget you have peace of mind. You know that you will have a place to live and food to eat and that your bills are paid. You have the confidence that you can handle an emergency that comes your way. This is invaluable, this is a priceless feeling and you can give that to yourself.
[What you earn]- [Bills you have to pay/ needed (non-discretionary) items] = [Money you can save] + [Money you can spend]
What you earn – you should know this, if you are an hourly worker who occasionally has the opportunity for overtime or holiday pay, base your budget on what you make working regular hours. This way when an overtime opportunity comes along it is a windfall; if you budget to always have that opportunity you could set yourself up for disappointment when it doesn’t come along (or worse set up your budget to fail). Look at what you earn net of taxes (how much you take home after Uncle Sam does his thing).
Bills you have to pay- these should be the obvious: Housing, Utilities, Insurance.
For housing your monthly payments should be fixed. Unless you want to be evicted/foreclosed on/homeless, start the budget… YESTERDAY.
Utilities can fluctuate based on the time of year so it makes sense to look at the cost for the past 12 months and average out the cost each month. You may budget $65/ month for electric and water with this method but see that in some months you only spend $40, that’s fine. When the summer rolls around and the air conditioner is on you may spend more than $65, but as long as the average still matches your budget you should be ok.
Insurance- Benjamin Franklin once said that the only thing that is certain in life is Death and Taxes. Well with the era of Obamacare, now Insurance is also a certain fact in life for us Americans, we have to be covered, or else we pay a fine/tax. For those who have insurance through an employer it should be easy to see what is deducted from your paycheck, for those who pay through an exchange you should be able to incorporate the monthly, quarterly or annual premium into the budget. If it is quarterly or annual just average out the cost so that you can see what goes to insurance each month. The same can be done with auto insurance from those who have a car (keep in mind registration fees too).
Needed Items- Food. Yes the only item after bills that you need is Food. Not clothes, not entertainment. Food. Your body needs nourishment. This is your priority. Determining a budget for food can be a little tricky so sit down and take a look at what you have spent in the last few months. If you don’t have those records it’s OK. Write down a number that you think is reasonable to be spending on food each month. Then every time you go to the grocery store and see the final tally make a mental note, “Wow, at this rate I’ll have money left over in my food budget,” or “Holy moly how much did that milk cost!” After a few weeks you will start to notice that you check prices and put in a little extra effort to save a few dollars here and there on your trip to the grocery store to be able to meet your food budget.
Once these two items are subtracted from your income you may have some money left over. If you don’t, continue to find ways to save at the grocery store and call your insurance providers to see about reducing your premium. Some bills may not come down, but if you are meeting your needs then you are doing great! With any surplus money every month you should first pay yourself.
I don’t mean treat your self, pay yourself. Future you has needs that you may not know about. Future you may need to pay for a new alternator on your car. Future you may have a family emergency that requires a last minute plane ticket. Future you may want to buy a house. Future you may need additional income in retirement. Future you deserves these things so pay her what she has earned- save your money. It helps to put a dollar value on these items to be able to build up enough funds.
Only after Future you has been satisfied with some money put in savings should you play with your spending money. Again, if you arrive at this point with no additional money to spend, good for you! Your present and future needs are being met! If you have some spending money then access with those precious few dollars what is important to you? Cable TV? New clothes? The Winning Williams would offer a suggestion- sit and reflect on what actually makes you happy. Then put your additional time, effort, and occasionally funds into that effort.
If you’ve read this far you’re probably thinking, “Man, a budget does sound like work, I don’t think I could ever-” Let me stop you there. Yes it will take a little work to start it up but once you do it’s relatively easy to maintain. Most things worth achieving in life take work. Think about how so many people can start out on a fitness routine. That first day is probably bad, the sore muscles the next day are worse, but once they see that muscle building, or they can fit into an outfit and feel great, they are hooked. That is what a budget can do for your financial fitness.
At the beginning of this year the Winning Williams set out to run a half-marathon. The first week, heck, the first day of training was so tough. It seemed like an impossible goal. But after some work, we actually ran a half-marathon. And we plan to run another later this year.
We chose to create and personalize our budget in Excel. This gives us ultimate control of the design and input. However, there are great budgeting tools out there for you that you don’t have to design yourself. One is Mint.com. Its a completely free service. Also, YNAB (you need a budget) is very popular among the personal finance community. While we haven’t personally used it, if you are not comfortable creating and using an Excel document, this could be a good resource. They have a free trial period and then I believe $60 for the software and online support.
If you need some specific help or advise on your budget, please ask. We’re super nerdy and wouldn’t mind helping. But please, if you don’t have a budget be honest about why- they’re not impossible. You can set a budget for yourself and you totally should.