The Life and the Lifestyle: Credit and Investing Part 2: Budgeting
We're back for another installment of "The Life and the Lifestyle: Credit and Investing"! I had fun doing the last one, so I've decided to try to keep to a Sunday schedule from now on. We'll see how that goes.
Last time, we talked about Online Banking, and how you can better make your money work for you. Hopefully, if you haven't already, you are doing research to find the best option for you. Why shouldn't you get the most for your money? The bank sure is!
This time, I thought I'd take it back a step and go back to the basics: Budgeting. Let's get started, shall we?
What Budgeting Is and What It Is Not
You get up on a daily basis and go to work. At the end of two weeks (or the 1rst and the 15th or maybe even weekly), you get that check of yours and you grin. The first thing you do is set aside some money for savings. Maybe you also have a 401k, so you have 3-10% taken out of each check to go for that. You take another 10% out of your check for your savings account, and then you're free to spend the rest. You decide to go shopping and pay your bills but by Monday your money is again looking long in the face and you're again just barely scraping by. This is not budgeting.
There's a misconception that Budgeting, real Budgeting, the kind that makes you sit down and really know your limits, is too restrictive. This is a terrible misconception and is the same one that leads to credit crisis. You've set your money aside in the bank. You pay your bills and you have some $300 or $400 left over for the week. You start giggling but before you know it, you've bought a couple new DVDs, you went shopping at the mall, you had a night or two out with friends, and you have $50 to your name again. Sure, you have your Savings account but you can hear your mother saying "Don't ever touch your savings until there's an emergency." Where do you turn to when something bad happens? Well, the credit card of course. It's painless. And you can pay it off monthly!
That is, until the charges start becoming too much for you to pay off with what's left from your check week to week. Then the finance charges start piling up and you feel like you're drowning because you have another bill to pay with the check that seems to just keep getting smaller. I don't have to keep going down this road. We know where it leads.
With proper budgeting, however, you can alleviate all of these problems. Budgeting is the idea of setting money aside, not just for emergencies, but for bills, for vacation, for weekly expenses, monthly expenses, and yearly expenses. It's a way of knowing what you're going to spend your money on before you even spend it, that way you aren't tempted to touch the money just because it's there. It's already ear-marked. And, once again, Budgeting is not restrictive.
What is "Proper" Budgeting?
I keep talking about proper budgeting as if there's some magical formula for it. There isn't. Everyone does their budgeting differently. There is no "right" or "wrong" way to do it. The only right way to budget is to make sure you have the most important items earmarked: your bills, emergency funds, and savings. What you do with the rest of your money is up to you.
Later on in the column, I'll detail how I do my budgeting and why it's extremely helpful for me but for right now I'll get down into the nitty gritty basics of budgeting and how to get started.
Experts say that you should divide your money as soon as you get it into percentages along these lines: 10% investing, 10% savings, 10% recreational expenses, 10% emergency funding, and 60% living expenses. I agree along these lines. When you get your check, you should get out of the habit of looking at it as one solid number and get into the habit of looking at your check as chunks of much smaller numbers. By doing this, you see the reality of your check.
Let's say that monthly you bring home $2400 after taxes. That seems like a big chunk of change and is about $600 a week. You get paid every two weeks, so you walk out of your job with $1200 in your pocket. Now let's get a little deeper into your life. Your rent is $750 a month, you spend $60 a month for electricity on average, $40 for water, and $100 for your cable/phone service. At the moment you are living paycheck to paycheck, but putting 5% into your 401k and $50 into your savings account everytime you get paid. The reality is that you should be looking at your check as follows: $120 minimum goes into your savings account, $120 minimum goes into your investing pool, $120 maximum is your recreational expenses, which includes eating out, shopping, buying cigarettes (hot topic!), and anything that is NOT NECESSARY TO LIVE BUT FACILITATES THE ENJOYMENT OF IT, $120 minimum goes to funding your emergency funds, and $720 per check should go to your bills. If there is extra after you pay bills, file that away into savings or emergency funding. This is how you should look at your check every time you get it.
Why these numbers? The whole point of Budgeting is to make sure you have money ready for when you need it. The worst feeling in the world is to have something happen and not have the money ready because you spent it while out with friends. It's also unnerving to use your credit card and find that you can't pay the monthly bill because it's simply too high, getting dinged with finance charges and late fees. Budgeting helps to alleviate all of this because it prepares you for untimely circumstances.
The Breakdown
What you want to do is sit down, either by yourself or with your significant other, and flesh out your finances. Find out what you spend money on. You would be surprised what people throw cash at without even knowing it. There's a lot of wasted income out there that could be doing someone some good. Once you have a clear, visual picture of what your finances are, it's time to do the budgeting break down. This is where you'll find out what percentages you need to take from your check for what purpose.
At this point, some people like to resort to paper, some people like to get on the computer, and some people try to keep a mental note. Don't keep a mental note. Even if you think you're going to remember it, you're not, and eventually you're going to overspend somewhere and forget about it. You can rail against me all you want, but unless you know the actual dollar amounts for your categories, you will get dinged. So don't do it. Keep the amounts on paper or on your computer. When you make a purchase, deduct it from the proper category. This is easier than you could imagine and you will always have proper totals that match up with your bank.
What I'm going to show you is how I do my budget. This is an example of what I do when I get a check.
In this image, you will notice that I have hard values for what is taken out of each check. These are our mandatory items, things that we automatically deduct after savings. I've divided our expenses by 4 and take out that amount per week. What ends up happening is that we have a surplus every 3 months, because of the fifth week at the end of the quarter. There will be a week that is unaccounted for, even though we still pay month to month. This surplus is not spent. Sometimes it's moved, as we did from groceries to home decor in this image, but most of the time it's meant to accumulate. This helps in the event of fluctuating expenses, like electricity, water, gas, and groceries. Sometimes, with a fixed rate, like your cable or phone bill, you can spill that extra into something else or hold onto it for the day you might decide to upgrade.
By doing this, the reality of our money becomes apparent and we have to act within these strict guidelines. It's not restrictive because we end up spending less than what's been earmarked.
So what about those expenses that you might want but aren't necessary to live? We solved the problem for that as well.
In this image, you will notice that instead of solid values, we use percentages. After all of the mandatory living expenses are paid for, we divide the remaining cash up and put it into these categories. Sometimes it's a small number and sometimes it's a large number, depending on the week and what needed to be earmarked (there are many times that our surplus is so large for the mandatory items that almost the full amount of our check goes into these percentage items).
By doing this, we're always saving for things we want, like vacation, home decorating items, and even new computer equipment. At the same time, all of our mandatory items are paid for, we have groceries, and gas.
What about play? I didn't show you any of the "play" money. Do we DO anything? Why, yes we do in fact. Recreation is under the mandatory section and is $50 a week. It's mandatory because no one should ever not have fun. It's only $50 because there are multiple ways to have fun without spending any money at all. $50 is for those times we want to go eat out or buy something new.
Remember, these are just examples. You don't have to be as detailed as I am. I'm detailed because I like to know what my money is doing (and if the bank is taking more than their fair share). You also don't have to do it in Excel. There are many programs out there that are great for this sort of thing. Excel simply offers flexibility and portability for me.
Putting it All Into Action
The first time you start doing your budget, you'll probably be coming off of a money drought. Don't worry, you can still do this! It IS tough the first month but it's easily feasible.
First, once you have everything earmarked and separated, stick to your plan. Make certain that you don't overspend. If you want to take it one step further, take your recreational money out of the bank, put the credit and charge card in a box at home, and carry only cash with you. Don't worry, you won't be robbed. No one can simply look at you and know how much cash you're carrying on you. And if you're that paranoid, ask when was the last time you were robbed on the street and that'll tell you the likelihood of getting robbed while you're out right now.
Second, don't hestitate to turn down friends, family members, or work buddies when they ask you to run out for the weekend to some expensive place that you would've just charged before. They aren't going to hate you and, frankly, if they get up in arms about it, ask yourself if they're really worth it. You're trying to make sure your life is straightened out, not satisfy someone else's needs.
Third, stick with it. The hardest part of this is readjusting your life to fit your financial means, especially if you've been living so far outside of them that you're suffocating yourself to stay afloat. After the first month, I promise that it gets easier. You'll have created a buffer for yourself and will easily be able to deal with anything that manages to crop up.
In the end, budgeting will help you stay the course. You'll find that you meet all your financial goals faster, you acquire the things you most want easier, and you're able to do things you weren't able to do before because your money was so long in the tooth. And if you ever get into any trouble, just remember, there are millions of people doing this very thing on a daily basis. All you have to do is ask and they will be happy to help!
Ideas!
If you have a neat way to go about your budgeting, let us know!
Last time, we talked about Online Banking, and how you can better make your money work for you. Hopefully, if you haven't already, you are doing research to find the best option for you. Why shouldn't you get the most for your money? The bank sure is!
This time, I thought I'd take it back a step and go back to the basics: Budgeting. Let's get started, shall we?
What Budgeting Is and What It Is Not
You get up on a daily basis and go to work. At the end of two weeks (or the 1rst and the 15th or maybe even weekly), you get that check of yours and you grin. The first thing you do is set aside some money for savings. Maybe you also have a 401k, so you have 3-10% taken out of each check to go for that. You take another 10% out of your check for your savings account, and then you're free to spend the rest. You decide to go shopping and pay your bills but by Monday your money is again looking long in the face and you're again just barely scraping by. This is not budgeting.
There's a misconception that Budgeting, real Budgeting, the kind that makes you sit down and really know your limits, is too restrictive. This is a terrible misconception and is the same one that leads to credit crisis. You've set your money aside in the bank. You pay your bills and you have some $300 or $400 left over for the week. You start giggling but before you know it, you've bought a couple new DVDs, you went shopping at the mall, you had a night or two out with friends, and you have $50 to your name again. Sure, you have your Savings account but you can hear your mother saying "Don't ever touch your savings until there's an emergency." Where do you turn to when something bad happens? Well, the credit card of course. It's painless. And you can pay it off monthly!
That is, until the charges start becoming too much for you to pay off with what's left from your check week to week. Then the finance charges start piling up and you feel like you're drowning because you have another bill to pay with the check that seems to just keep getting smaller. I don't have to keep going down this road. We know where it leads.
With proper budgeting, however, you can alleviate all of these problems. Budgeting is the idea of setting money aside, not just for emergencies, but for bills, for vacation, for weekly expenses, monthly expenses, and yearly expenses. It's a way of knowing what you're going to spend your money on before you even spend it, that way you aren't tempted to touch the money just because it's there. It's already ear-marked. And, once again, Budgeting is not restrictive.
What is "Proper" Budgeting?
I keep talking about proper budgeting as if there's some magical formula for it. There isn't. Everyone does their budgeting differently. There is no "right" or "wrong" way to do it. The only right way to budget is to make sure you have the most important items earmarked: your bills, emergency funds, and savings. What you do with the rest of your money is up to you.
Later on in the column, I'll detail how I do my budgeting and why it's extremely helpful for me but for right now I'll get down into the nitty gritty basics of budgeting and how to get started.
Experts say that you should divide your money as soon as you get it into percentages along these lines: 10% investing, 10% savings, 10% recreational expenses, 10% emergency funding, and 60% living expenses. I agree along these lines. When you get your check, you should get out of the habit of looking at it as one solid number and get into the habit of looking at your check as chunks of much smaller numbers. By doing this, you see the reality of your check.
Let's say that monthly you bring home $2400 after taxes. That seems like a big chunk of change and is about $600 a week. You get paid every two weeks, so you walk out of your job with $1200 in your pocket. Now let's get a little deeper into your life. Your rent is $750 a month, you spend $60 a month for electricity on average, $40 for water, and $100 for your cable/phone service. At the moment you are living paycheck to paycheck, but putting 5% into your 401k and $50 into your savings account everytime you get paid. The reality is that you should be looking at your check as follows: $120 minimum goes into your savings account, $120 minimum goes into your investing pool, $120 maximum is your recreational expenses, which includes eating out, shopping, buying cigarettes (hot topic!), and anything that is NOT NECESSARY TO LIVE BUT FACILITATES THE ENJOYMENT OF IT, $120 minimum goes to funding your emergency funds, and $720 per check should go to your bills. If there is extra after you pay bills, file that away into savings or emergency funding. This is how you should look at your check every time you get it.
Why these numbers? The whole point of Budgeting is to make sure you have money ready for when you need it. The worst feeling in the world is to have something happen and not have the money ready because you spent it while out with friends. It's also unnerving to use your credit card and find that you can't pay the monthly bill because it's simply too high, getting dinged with finance charges and late fees. Budgeting helps to alleviate all of this because it prepares you for untimely circumstances.
The Breakdown
What you want to do is sit down, either by yourself or with your significant other, and flesh out your finances. Find out what you spend money on. You would be surprised what people throw cash at without even knowing it. There's a lot of wasted income out there that could be doing someone some good. Once you have a clear, visual picture of what your finances are, it's time to do the budgeting break down. This is where you'll find out what percentages you need to take from your check for what purpose.
At this point, some people like to resort to paper, some people like to get on the computer, and some people try to keep a mental note. Don't keep a mental note. Even if you think you're going to remember it, you're not, and eventually you're going to overspend somewhere and forget about it. You can rail against me all you want, but unless you know the actual dollar amounts for your categories, you will get dinged. So don't do it. Keep the amounts on paper or on your computer. When you make a purchase, deduct it from the proper category. This is easier than you could imagine and you will always have proper totals that match up with your bank.
What I'm going to show you is how I do my budget. This is an example of what I do when I get a check.
In this image, you will notice that I have hard values for what is taken out of each check. These are our mandatory items, things that we automatically deduct after savings. I've divided our expenses by 4 and take out that amount per week. What ends up happening is that we have a surplus every 3 months, because of the fifth week at the end of the quarter. There will be a week that is unaccounted for, even though we still pay month to month. This surplus is not spent. Sometimes it's moved, as we did from groceries to home decor in this image, but most of the time it's meant to accumulate. This helps in the event of fluctuating expenses, like electricity, water, gas, and groceries. Sometimes, with a fixed rate, like your cable or phone bill, you can spill that extra into something else or hold onto it for the day you might decide to upgrade.
By doing this, the reality of our money becomes apparent and we have to act within these strict guidelines. It's not restrictive because we end up spending less than what's been earmarked.
So what about those expenses that you might want but aren't necessary to live? We solved the problem for that as well.
In this image, you will notice that instead of solid values, we use percentages. After all of the mandatory living expenses are paid for, we divide the remaining cash up and put it into these categories. Sometimes it's a small number and sometimes it's a large number, depending on the week and what needed to be earmarked (there are many times that our surplus is so large for the mandatory items that almost the full amount of our check goes into these percentage items).
By doing this, we're always saving for things we want, like vacation, home decorating items, and even new computer equipment. At the same time, all of our mandatory items are paid for, we have groceries, and gas.
What about play? I didn't show you any of the "play" money. Do we DO anything? Why, yes we do in fact. Recreation is under the mandatory section and is $50 a week. It's mandatory because no one should ever not have fun. It's only $50 because there are multiple ways to have fun without spending any money at all. $50 is for those times we want to go eat out or buy something new.
Remember, these are just examples. You don't have to be as detailed as I am. I'm detailed because I like to know what my money is doing (and if the bank is taking more than their fair share). You also don't have to do it in Excel. There are many programs out there that are great for this sort of thing. Excel simply offers flexibility and portability for me.
Putting it All Into Action
The first time you start doing your budget, you'll probably be coming off of a money drought. Don't worry, you can still do this! It IS tough the first month but it's easily feasible.
First, once you have everything earmarked and separated, stick to your plan. Make certain that you don't overspend. If you want to take it one step further, take your recreational money out of the bank, put the credit and charge card in a box at home, and carry only cash with you. Don't worry, you won't be robbed. No one can simply look at you and know how much cash you're carrying on you. And if you're that paranoid, ask when was the last time you were robbed on the street and that'll tell you the likelihood of getting robbed while you're out right now.
Second, don't hestitate to turn down friends, family members, or work buddies when they ask you to run out for the weekend to some expensive place that you would've just charged before. They aren't going to hate you and, frankly, if they get up in arms about it, ask yourself if they're really worth it. You're trying to make sure your life is straightened out, not satisfy someone else's needs.
Third, stick with it. The hardest part of this is readjusting your life to fit your financial means, especially if you've been living so far outside of them that you're suffocating yourself to stay afloat. After the first month, I promise that it gets easier. You'll have created a buffer for yourself and will easily be able to deal with anything that manages to crop up.
In the end, budgeting will help you stay the course. You'll find that you meet all your financial goals faster, you acquire the things you most want easier, and you're able to do things you weren't able to do before because your money was so long in the tooth. And if you ever get into any trouble, just remember, there are millions of people doing this very thing on a daily basis. All you have to do is ask and they will be happy to help!
Ideas!
If you have a neat way to go about your budgeting, let us know!