Finances are important to everyone – whether you are rich, poor, a big spender, or frugal. At the end of the day, many of the things we need to live cost money. As such, our financial situation can oftentimes be the single greatest stressor in our lives. Over time, I have found most of the stress of finances comes from the unknown – such as an unexpected bill or having less money in your bank account than expected. The good news is, budgets are one of the easiest, most helpful ways to shed light on the unknowns of our finances.
Few things can put your finances into perspective like a budget. Making one can be liberating and/or humbling. A budget can tell you where you are doing well, reveal areas where you can cut down on spending, and expose costs that have little purpose but are draining your finances. Budgets are a great way to help you start getting your finances under control if done properly, as it literally tells you where your money is going.
Even though budgets are super useful for nearly everyone, it never ceases to amaze me how few people make one. I have found what stops most people is they either do not know how, get too caught up in how specific or generic a budget needs to be, or just do not know where to start. So today, I am going to help you create a simplified monthly budget that you can build on to meet your needs.
Start with your income
Starting simply, write down how much you make a month. For those on a salary, or with consistent hours, this should be relatively simple. If you have more than one job, make sure you factor that job in as well. If you are combining your finances with another, such as your spouse, make sure that their salary is included as well.
For those that do not have a consistent job, such as a contractor, part-time worker, or someone currently in-between jobs, I would base your budget on what you know is coming in. However, if you feel you have a side-gig that might bring in some extra cash, then you can estimate your income. Just remember, if you estimate, your budget will likely not be as accurate.
Identify each expense
You need to identify each expense, whether it is something static like a bill or something that may change month to month, like food.
Here is a list of some monthly expenses that are billed:
- Rent/mortgage
- Utilities (electric, natural gas, water, sewage, garbage)
- Phone bill (cellphone or landline)
- Internet, cable, and/or dish
- Car payment
- Insurance (car, home, or renters)
- Student loans
Here is a list of some expenses that might change month to month:
- Groceries
- Gas for your car
- Car maintenance (such as an oil change)
- What you spent eating out
It is also a good idea to track what you spend over the course of the month to truly give yourself a good idea of how much you are spending on each expense – especially the variable expenses like gas or eating out. If you use credit cards or your checkbook for most things, then you can generally use your statements to reveal where your money is going.
Categorize your expenses
Next, you will want to categorize your expenses. Below, I have created a standard group of categories and what might be included in each. I have also added some general percentages next to each category. These percentages represent a target of how much of your income should go to each section. They are intended as a guide; your situation and goals may differ. Being less than each is ideal – outside of savings of course. If you are over in a category, then you have identified an area where you may be spending too much of your income. These percentages are based on the net income after taxes for the median U.S. household income. The median income in 2016 was $57,617. So the after taxes net income would be an estimated $51,855, assuming an effective 10% tax due to the new standard deduction introduced in 2018.
Categories:
- Housing – 25%
- Includes expenses like Rent/Mortgage, and utilities.
- Food – 10%
- Includes groceries and eating out.
- Car – 10%
- Includes auto insurance, gas and general maintenance like oil changes.
- Debts – 10%
- Includes items like credit card bills, student loans, and car payments.
- Medical/Health – 10%
- Includes items like health insurance and medical costs.
- Entertainment – 10%
- Includes items like a gym membership, Netflix subscriptions, cable, and watching movies at the cinema.
- Miscellaneous – 10%
- Includes items like lawn care, cleaning supplies, sports league dues, and new clothes.
- Savings – 15%
- Includes things like retirement, emergency fund, and short/long-term savings.
Note: This budget does not factor in giving (such as a tithe or donations) to simplify the budget as its percentage can vary greatly. If you give regularly, it is a good idea to factor it into your specific budget – the percentage you give is also up to you – just remember to adjust the other percentages.
I have included what a sample budget may look like using these percentages here. Please note this sample budget has the health insurance provided by the employer – so it may be lower than individually bought insurance. It also takes 15% out in taxes to simulate a paycheck with federal, state and local taxes. Your situation may differ.
Again, these categories and percentages are simply meant as a guide. You can be more specific if you want. If you make more than the national average, you may want to adjust the percentages for certain categories like food, as you will likely not spend too much more, even if you make more. If you have a financial goal – like getting out of debt, maybe put more money into your debt category and less into the entertainment category.
There you have it, you now have the tools to create your very own budget. After creating your budget, you can hopefully see where your money is going, and where you may need to make necessary changes. A word of caution though, while a budget is immediately useful in telling you where your money is going, its true power lays in the hands of those disciplined enough to follow the budget as it will help you get your spending under control.
Also, as life changes, change your budget with it. I made a budget monthly for a while and then moved to quarterly as I got into a routine and saw that my spending and expenses did not change much month-to-month. You may find a yearly one helpful or even a weekly one. Your budget can change with you and is a tool meant to help you take control of your finances.
Please note: I am not a certified financial planner (CFP), however, my comments are made based on personal investigation and experience.
Quote of the day: Smart financial planning – such as budgeting, saving for emergencies, and preparing for retirement – can help households enjoy better lives while weathering financial shocks. Financial education can play a key role in getting to these outcomes. – Ben Bernanke
