For most people, the word “budget” is a four-letter word with two extra letters thrown in just to add insult to injury. Forget about trying to figure out how to properly budget your finances. Who wants to do that?
Well, if you’re determined to get your money situation in order, then you will be among those who do.
It’s a good time to do it, too.
The Low-Down on Credit Card Debt in America
According to an article on the Motley Fool website, as of November 2018, $5,551 was the amount of credit card debt that the average American household carried.
Doesn’t sound like THAT much, right? Well, that figure is deceiving, it turns out. According to the same article, less than 40% of all Americans have any kind of credit card debt at all. This means that the per person average for credit card debt is over 16 grand among the 40% or so who do carry credit card debt.
For many, budgeting is easier said than done, especially for those who have very little experience with it. Learning to budget properly can feel both like an art and a science, especially when it comes to how you spend your “extra” cash. Those who find themselves deeply in debt face even more obstacles in this arena.
In light of this, the goal of this post is to offer some advice about how best to set your budget. It provides some information about why you should keep a budget as well as offering some tips for people with different types of income challenges.
1. Decide Why You Should Budget
Despite the bad rap that budgeting gets, it turns out that making one actually gives you peace of mind. Compared to chronic spenders, Budgeters report having no worries about their finances by a ratio of two to one, according to Motley Fool.
Could it be that the financial equivalent of dieting is the key to your financial happiness? It looks that way, but only if you determine why you’re motivated to keep a budget.
Here are some of the top reasons why people report their reasons to budget their money:
- They don’t worry about living paycheck to paycheck.
- They have enough money to pay for their retirement.
- They can vacation without guilt.
- Keeping a budget allows those who are extremely motivated to retire early.
- People in control of their finances have more control over their lives in general. Many of the most financially savvy people could quit their jobs and survive for a number of years without having to get another job, according to the book “The Millionaire Next Door.”
- Couples who budget fight less about money, bringing harmony to their relationships.
- People who live with a lot of debt find it motivating to budget so that they can get out of debt.
- Having a budget and some savings means that if a rainy day comes, the financially astute among us won’t get wet.
At Dutchess Partners, we encourage people to figure out exactly why they want to keep a budget before they go on to any of the practical steps of budgeting. People who don’t have the “why” usually don’t find the “how.”
2. Creating a Budget if You Have a Regular 9-to-5 Job
You cannot earmark your money for anything if you don’t know how much of it you have, which is why financial sites like The Balance tell budgeters to figure out their income before they do anything else. If you work a regular 9-to-5 job, then this task should be fairly straight forward. You look at your pay stubs and write down the total amount in your budget ledger’s “Income” column.
However, if you’re a tipped employee or work on commission, then this can get a bit tricky. We’ll touch on this more in a bit.
Anyhow, once you know how much you bring in, then you need to figure out how much you pay out each month. To accurately determine this, gather together your utility bills, credit card statements, etc. You may be surprised at how much of your income goes down the drain without you realizing it. A gourmet cup of coffee here, lunch or dinner out there can add up pretty quickly.
If you find that you’re spending more than you thought you were, then you may want to keep a financial diary. This is kind of like a food diary for dieters, except that it pertains to your financial diet and not your nutrition.
Every time you drop some cash on anything, you need to write that information down in this ledger. This helps you regain control of your spending.
Once you have both of these pieces of information figured out, then you’ll want to decide on a budget type. One type of budget that many financial advisors recommend is the 50/30/20 budget. When you adhere to this budget, you have determined that 50% of your budget goes toward the things you cannot live without, like rent or utility money.
Thirty percent of your money gets earmarked for fun stuff, like nights out at the movies. Finally, you should put aside 20% each month for the purposes of savings and investing.
There is one caveat to this budget, however. If you are deeply in debt, you may need to adjust the 30% you allocate for fun. Maybe for a time, you decide that you’ll only spend 10% on fun and that you’ll put the rest toward debt.
Some very strict budget advisors, like financial advisor Dave Ramsey, even recommend that all of your money, including the 20% that you’d put toward savings and investments get put toward debt reduction until you are out of debt. He calls this style of budgeting “snowballing” and likens it to running at your debt with gazelle-like intensity.
If you opt for this debt-reduction plan, you should know that you won’t be putting off saving and investing forever: You’ll just do this until you’re completely out of debt. Then, your budget can return to the 50/30/20 budgeting model if you wish.
3. Budgeting with an Irregular IncomeIn this final section, we’ll cover how you create a budget when you work as a tipped employee or on commission. These income types tend to be very irregular. Sometimes, you make a lot of money. Sometimes, you’re broke.
With this plan, you alter the steps above slightly. First, you must figure out your expenses as you would normally. Again, this gives you a picture of how much you have going out each month.
However, there is a caveat. One of the expenses that you put into this type of budget should be the 10% to 20% you would earmark for savings. You also need to set aside money for taxes if you are self-employed. (Your accountant can tell you how much this should be roughly.)
After that, you’ll want to figure out which of your expenses are the most pressing. In other words, where are your spending priorities? Clearly, you want to keep a roof over your head. You’ll also need to keep the lights on. When you have money for these expenses, pay them.
Other expenses may go by the wayside. You may not need cable TV or gym memberships. Fun money gets a much lower priority, too.
What shouldn’t get a lower priority is your savings. This is where having six months’ worth of income is a really good idea. In fact, any extra money that you have after your budget has been met should go toward your savings. Doing this will allow you to have money in the bank when you have a slow month.
Final Words on How to Budget Properly
At Dutchess Partners, their representatives have become very familiar with people who feel reluctant to make a budget. However, they have observed that the people who get control of their budgets are happier and have less worry than those who don’t.
Different types of budgets exist that address both the people who have a steady source of income and the people who don’t. The type of budget you settle on will be determined by the kind of income you bring in each month. This post gives you some practical ideas about how you can set up a budget, regardless of what kind of income type that you have.
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