No. 2
I can honestly say that I have never met anyone who enjoys budgeting. Just the very mention of the word makes most people’s palms sweat. Budgets can take time to create, but there is no denying that knowing what you can spend and save is worth the investment of time.
On the flip side, attempting to create a budget that is too exact and restrictive can create more stress than it was designed to relieve. Hopefully, the process outlined below will allow you to reduce the time it takes to create a plan, while getting the numbers close enough to provide the necessary financial discipline.
Getting Started
Step 1 - What is your monthly income?
If you are already employed and have a paystub to refer to this is a simple task to complete. However, if you are beginning your first job, or a new job, you’ll have to do some basic calculations to determine your take-home pay. You can also use a paycheck calculator to achieve the same result.
Calculating your monthly take-home pay varies by the state and city in which you live and any pre-tax or post-tax deductions that are taken out of your gross pay. It really isn’t has hard as it sounds.
Monthly Gross Pay (Annual salary/12)
Taxes (Determine the percentage and multiply by gross monthly pay)
Federal
State
Local
FICA and State Insurance Taxes (Determine the percentage and multiply by gross monthly pay. Will vary by State in which you work/live.)
Social Security
Medicare
State Disability Insurance Tax
State Unemployment Insurance Tax
State Family Leave Insurance Tax
State Workers Compensation Insurance Tax
Pre-Tax Deductions (The are deducted from your gross monthly pay before taxes. Not all may apply.)
Medical Insurance
Dental Coverage
Vision Insurance
401(k)
Long Term Disability Insurance
Life Insurance
FSA
HSA
Post-Tax Deductions (These would be deducted from your after-tax monthly pay)
Total Monthly Take-Home Pay
Step 2 - Where is your money going?
Once you have a handle on how much cash you take-home each month you have to figure out where your cash goes. Begin by writing down the fixed expenses that you incur each month like, rent, utilities, and loan payments. Then gather up your receipts and, if you use a credit card or online bill pay, take a look at your other monthly expenses and write those down. Remember those expenses that you might pay annually, semi-annually, or quarterly, such as life, car, or apartment insurance and subscriptions. Once you think you have everything, begin putting them into categories (see below).
If you are just starting out and trying to determine what your budget might be talk to friends who are living in the same geography where you will be living and see if they are willing to share some of their monthly expense data with you. Also, if you aren’t sure what you can afford in rent leave it blank and see what’s left after filling in all of the other expenses. Remember that you’d still like to save 5% - 10%, so take that into consideration before signing a lease that will leave you without any savings or extra cash.
Housing
Rent/Mortgage
Utilities (water, gas, electric)
Fees (HOA, property taxes)
Food, Transportation, and other
Groceries/Toiletries
Health (prescriptions, other medical not covered by insurance)
Car Payment
Car Maintenance
Commuting (fuel, tolls, parking, other transportation)
Clothing
Entertainment
Magazines/Newspapers/Miscellaneous Subscriptions
Cable & Internet
Gym/Club Memberships
Dining/Takeout
Travel/Vacation
Insurance
Renter’s/Homeowner’s
Car
Additional Healthcare (not already taken out of gross pay)
Other (life, disability)
Miscellaneous
Debt
Student Loans
Car Loans
Credit Card
Other
Now, add it all up and see what’s left. Remember that you ideally want to have 5% - 10% left for savings.
The next step is to go through all of your expenses and determine which are necessities and which are discretionary. If you are like most people your largest expenses will be necessities or items for which you don’t have much flexibility to pay or not pay. (e.g., rent, loans, insurances, food). Now, take a look at the discretionary items and see where your money is going. Can you do without some items or at least rein in your monthly spending in some areas? Can you curtail some spending habits like the daily decaf latte with almond mild from your local coffee shop? That $4 to $5 dollars per day, 7 days per week, 52 weeks per year adds up. In fact, at $4 per day it’s $1,456.00 a year! If this is your only guilty pleasure, then find savings somewhere else in your budget.
This may sound crazy, but every January I call my cell phone provider, Internet provider and others and try to renegotiate my contracts. It takes a little time, but I find it to be good fun talking to the various reps who are often willing to help. My simple rule is that if you haven’t used it, lose it. This includes subscriptions, memberships, and assets (treadmill, bike, clothing). Assets that don’t get used are just losing value in your home. It’s best to sell while they still have some tangible value.
There are a number of apps that allow you to track your spending across multiple accounts. One that I have some experience with is Mint. With. Mint you can also build a budget and track your spending.
My father’s business mentor once told him, “Watch your pennies, because dollars watch themselves.”
Resources Mentioned in this post:
Hi Angelo,
question about rent / mortgage, do you have a good rule of thumb? I've heard 30% gross, 25% gross, 20% net. 3x gross income (I think this was millionaire next door model), and if mortgage would it be higher since you can deduct interest? thanks! -scott