As you’re reading this, I’m currently on my way down to South Carolina. I figured if I’m bored on my 12 hour car trip, you should be bored too, so I’m making you read about budgets! Just kidding of course. I’ve said before how I think budgeting and finance are quite interesting but I know it’s not for everyone, so if budgets do nothing for you, then move along, and I’ll be back tomorrow with a more interesting post.
Still with me? Awesome. I think budgets are a huge part of striking out on your own, and since I am trying to write honestly about the trials of building a life for myself as a young lady (sounds like I’m in trouble, right?) I wanted to let you inside the finances of my day to day life.
I actually began budgeting in college. My education was financed through scholarships, student loans and a million part time jobs. I had money coming in from a few sources and money going out to many, many sources including tuition, rent and food. Once I bought my first car (the car I’m currently driving down to SC- well, not as I type, but you get the idea) after my junker bit the dust, I had a my very first loan payment that I was responsible for, so I figured it was time I got a better idea of where all my
pennies monies were going. It took A LOT of trial and error to get a budget nailed down, but I’m glad I started when I did because after college there were only more bills to worry about, so it was nice to have a bit of a head start in learning to manage it all.
If you don’t have a budget, I strongly suggest you make one. It’s one of the most empowering things you can do. Seriously. Understanding your finances helps you feel in control and allows you to make big goals for the future. Believe me, I know it sounds really scary at first, but the numbers are always much less intimidating when you see them laid out in black and white. This is true even if you’re totally poor; trust me, with student loans, my net worth is currently -$23,130.33. That’s a negative symbol there. Not only am I worthless (financially speaking of course) I’m in the hole. My goal is to be worth $0 in 5 years, and trust me, being a 0 will feel amazing.
*** DISCLAIMER: I am not a certified financial adviser. I am not a financial professional, and nothing I say should be taken as professional advice (I post 8,000 pictures of my cat, so nothing you read here should be considered professional anything, ever). Everything I say should be regarded as ideas and tips that have worked for me. You are responsible for making decisions that are best for you. That may include seeking the advice of a true professional, which, again, I am not.***
Anyway, back to you. So, have I convinced you to start a budget? Great! Let’s begin. I’ll tell you what I did. First, I got organized. I…
- wrote down the balances of all my monies- my checking and savings accounts
- made a list of all my debts- credit cards, car loans, student loans
- subtracted the first from the second to find out my (negative) net worth to have a better idea of the broad standing of my finances.
Next, I needed to know what I made and what I spent on a monthly basis. Here’s what I used:
- A pay stub
- 3 months of checking account and credit card statements
Here’s what I did to figure out what I made:
- figured out what I made after tax using my pay stub to find my net salary (salary after taxes and health care contributions)
- multiplied my net salary by two (because I get paid twice a month) to find my monthly take home pay. <— this was my starting point because you cannot spend more than you earn, so this gave me an idea of how much I had to work with.
Here’s what I did to figure out what I spent:
- went through those bank/credit card statements line item by line item, and sorted every dollar spent into a category. This was by far the most tedious and time consuming part.
- the key to reviewing my spending was to be honest and not judge myself. I was building a budget, so I was already on the right track. If I found out I spent way too much on coffee every month, I made a note of it and moved on without beating myself up.
- in building my categories I tried to be broad enough that I didn’t end up with a separate budget line for every single thing (lunch out, dinner out, makeup, hair stuff), but also specific enough (see food out, personal care) that I could identify areas where I might be spending too much. This is a personal preference. I’ve seen budgets with 27 different line items as well as budgets broken down into: savings, bills, and other. In the beginning I suggest using categories so you know where you’re spending your money, but it’s really up to you
It took some trial and error but I ended up with the following expenditure categories (in alphabetical order because I’m Type A):
- car payments
- cell phone payments
- food out (restaurants, takeout, bars)
- insurance (car, renters)
- miscellaneous spending (Miles’ food and vet visits, cash withdrawals, movies, music)
- personal spending (makeup, shampoo, prescriptions)
- rent (incl. utilities, cable, internet)
- running (races, sneakers, Gus, sports bras)
- student loan payments
- transportation (gas, tolls, parking tickets, public transportation, plane tickets
Once I had my categories, I divided each number by 3 (remember, I looked at three months because I wanted to know what I spent on average) to get a rough idea of my expenses.
Now I had to build a budget. I researched on the interwebs and found an approach that worked for me. I currently use the 50-30-20 style of budgeting. What that means is, I aim to keep my monthly bills (needs) at 50% of my take home pay, so I can devote 20% of my take home pay to savings and debt repayment and the other 30% to variable expenses (wants). I found this style of budgeting to be a really simple way of tackling a complex problem.
This is a chart of my actual budget breakdown. Needs are a bit high, but I live in a high cost area, so my rent is a bit skewed.
Let’s break this down into what each section includes.
First I took a look at my monthly bills because they were mostly fixed, and had to be paid, so that’s where my money was going first. I had to make sure that I wasn’t spending more than half my income on bills. Luckily, I came pretty darn close, but whereas I always thought I could afford a nicer car when they time came, I learned that unless I lost some other bills, I could not. I was living right within my means, and knowing that helped me resist the urge to “upgrade my lifestyle” in any significant way.
Some options for cutting down on these fixed expenses include small things like, cutting down on your cable/internet options or finding a cheaper cell phone plan (this actually prompted me to look for discounts, and it turns out my company gets a discount with AT&T, so I jumped on that) as well as bigger things like looking to move to a less expensive area or finding a more affordable car.
After making sure I had enough to pay my bills, I was able to determine what portion of my income I could devote to saving and debt repayment. I took my monthly take home pay and multiplied it by 10% to determine what I could allocate to savings and student loan debt. Next, I set up automatic monthly transfers so that on the first of each month, money is pulled directly from my paycheck or out of my checking account and deposited into a retirement fund, a long term savings fund and an emergency savings fund. I also set up automatic bill pay (I even got some discounts for doing this) for my car, cell phone, insurance and student loans. This insures that I’m saving (paying myself first) and paying all my bills without even thinking about it.
What was left in my budget (and my checking account) was what I had to live off of. This helped me to adjust all those variable budgets and still live within my means.
Included in my wants were:
- donations (mostly because I didn’t know where else to put it)
- food out
These budgets are pretty flexible month to month. If I’ve got a ton of birthdays coming up, my gift budget usually grows at the expense of my clothing budget. If I’m paying for a half marathon, my coffee and personal budgets usually shrink. I’m ok with them being flexible, I just make sure that every dollar I add to one budget comes out of some other budget.
The thing about budgets is, you can’t just build them and forget them, you’ve got to track them too. I used to drive myself crazy with tracking; I’d account for every single dime that came or went, but that was far too frustrating to be realistic, so now I give myself a little leeway. In an excel spreadsheet, I keep track of anything I spend on my debit/credit card. This is usually everything but miscellaneous. I take half my miscellaneous budget (I save the other half for unforeseen expenses) out as cash. I still record the expense to that budget line, but I don’t track every dollar I spend. Once the money is in my hands, I consider it spent, and when it’s gone, it’s gone, so I try to make it last the entire month. This way, I’m living within my means without constantly jotting down every bottle of water I buy on a whim. I also find that spending only cash on miscellaneous things makes me a lot less likely to indulge in little impulse buys. Seeing exactly how much I have left for the month really keeps me in check.
Every few months, I review my detailed spending to make sure that my budget still works for my life. If my rent goes up, I can’t spend as much on things I want. If I find a way to hammer down my grocery budget, I can throw more money towards paying off those student loans.
Sometimes it’s frustrating. I wish I were debt free. I wish I had a bigger savings cushion in the event of an emergency. I worry how I’ll ever be able to pay for a wedding or save for a down payment, but ultimately I sleep better at night knowing I’m living within my means, and that is worth every minute spent budgeting.