If you don’t have a household budget it’s sort of like driving at night with your lights off. You may be okay for a while but ultimately you’ll run it into a problem that totally wrecks your finances. The timing belt in your car’s engine could break, you could have a serious medical emergency or you could need to replace a bunch of furniture because a pipe broke and flooded your living room. When you haven’t budgeted for things like this you could find yourself headed towards financial disaster in the blink of an eye.
Tracking your spending
Whether you choose the simple or more not-so-simple way to develop a household, you will need to first track your spending for at least a month. This means writing down everything you spend money on right down to those drive-through coffees. Most people find the easiest way to do this is by keeping a small notepad with them at all times so that whenever they spend money they can immediately jot down how much and for what. And yes, this won’t be a fun exercise but it’s absolutely essential.
The simple way to develop a budget
Once you’ve tracked your spending for a month you will need to decide which budgeting method to use. The simple way is by following the 50/20/30 rule. The way this works is that you organize your spending as follows: 50% of your net income for essentials, 20% for savings and 30% personal.
So what are essentials?
These are those categories where you would have to spend money regardless of where you live or your future plans. Essentials generally include utility bills, food, housing and transportation costs. You could also add insurance premiums to this category as well as student loan debts if you have any.
The 20% for savings
This is where you commit 20% of your take-home pay towards savings. This would include savings plans, emergency funds and debt payments. Of these three, your first priority should be to build an emergency fund as this is how you shelter yourself from the kinds of emergencies that would totally wreck your finances.
The 30% personal
This category should include things such as your cable bill, those drive-through coffees, your cell phone plan and your entertainment. You could also toss your gym membership, weekend trips and dining out with friends into this category. It’s entirely up to you which of your expenses you decide to designate as “personal” versus those that are ‘essential.’ But what this boils down to is that 30% personal is money you can spend just about any way you choose.
The not so-simple way to make a budget
There’s also a not-so-simple way to make a budget. It’s where you create some very specific spending categories and then assign a percentage to each. Here’s an example of what this might look like.
Savings: 5 to 10%
Housing (rent, mortgage, taxes, insurance); 25 to 35%
Food: 5 to 15%
Utilities (heat, water, telephone, etc.): 5 to 10%
Transportation (automobile, public transportation,
Taxis, Uber or Lyft): 10 to 15%
Clothing: 2 to 7%
Leisure and education: 5 to 10%
Health (insurance, dentist, glasses, medication, etc.): 5 to 10%
Personal: 5 to 10%
Of course, you may want to organize your categories differently or even divide some of them into subcategories.
Get an app
You’ve now done the hard work. The easier part is learning to stick to this budget. It’s easier because there are a number of apps that can help. One of the most popular of these is Mvelopes. The way it works is that you create a virtual envelope for each of your categories and then assign money into it based on the percentage of your budget it represents. For example, if your take-home pay is $5000 a month and you had budgeted 10% for housing, you would assign $500 to that Mvelope.
This is a sort of tough love form of budgeting because when you empty one of your Mvelopes you’ll have to stop spending money in that category or move money from another Mvelope into it. An example of this would be if you assigned 5% ($250) to your Personal Mvelope and spent all of it a week before your next pay day. You would then have to either stop spending in your Personal category or maybe move $100 from your Clothing Mvelope into this one.
Just pick one
It isn’t important which of these two forms of budgeting you choose. The important thing is to choose one and get started. The happy news is that if you stick with your budget, after some period of time it will become second nature to you and you may be able to stop writing anything down or worrying about your Mvelopes. You’ll instinctually know how much money you can spend in each of your categories and what you need to do if you overspend in any of them. In other words, you will be able to carry your budget in your head as many consumers actually do.