Friday, February 24, 2012

How I budget, and maybe how you can too!

It occurred to me that all my concerns and whining about budgeting and how to budget, well, I’ve never really explained what I do.

What are we working with, exactly?

Best way to start budgeting (with the ultimate goal to save some moolah) is to do some math. Don’t worry, this is easy math, and you can use a calculator if you want (I definitely do)! This might be the kind of thing that you jot down in a journal (maybe you keep one for expense tracking – responsible of you!) or in a document on your computer.

Note: It’s worth noting that the first couple of months, I just tracked everything I earned and spent in an Excel spreadsheet. I only know how to do SUM equations, and that’s all I needed to determine how much I was spending and how much I was saving. This gave me a baseline for the calculations you make in the next sections and in determining how much I could reasonably save every month. It’s nice to know in advance how well you *could* be doing, barring emergencies, unexpected essential expenses (like bills you didn’t anticipate), or see if you are really off your mark and could use some tightening-up of the imaginary belt. I saw a lot of things that I didn’t need to be buying, such as dietary treats I could live healthfully without, things for the apartment that we’ll keep doing well enough without, and CLOTHES.

Income

My bi-weekly paychecks rarely vary since I always work 40 hrs a week, sometimes an hour or two more here and there. I don’t usually have any other kind of income, so I use my pay statements to determine how much income I’ll have for the month. My pay statements subtract $30/paycheck for medical costs (I have a Flexible Spending Account that I use to pay for bills & copays), ~$5 for vision insurance, a percentage for my 401k, and taxes, so I can see exactly what gets taken out before it hits my bank account. I hope to get rid of the FSA for next year, assuming I’m in better health and don’t think I’ll need to set aside nearly as much money for medical expenses.

If you have any other sort of income every month, make sure you are tracking that somewhere so you can keep it in mind for your calculations and savings-attempts every month. I choose not to keep any additional income from local tech support separate because it’s just an easier excuse to spending money I should really be saving. Once you’re doing a good job of saving, you can reward yourself occasional with material items, but when you’re first starting off, you definitely shouldn’t! The savings are in and of themselves rewards :)

Essential payments: This part is the hardest for most people. What do you ABSOLUTELY HAVE TO NO-QUESTION-ABOUT-IT spend money on every month? Or every week, or two weeks, if that’s easier for you.

Rent: Since I live in an apartment, I first take my monthly income and subtract my rent payment.

Utilities: I subtract estimated expenses for utilities (I pay for gas for the apartment, and I’m using the car so I include gas for that as well), which is usually about $100 for the month.

Groceries: I subtract estimated expenses for groceries. This can vary a lot, but generally, the boyfriend and I spend $400 in groceries every month, so I can expect to spend at least $200 on this. Note: Grocery totals should NOT include treats for yourself, like anything sugar-laden or unnecessary! They *should* include home maintenance kind of items, like toilet paper, paper towels, and cleaning supplies, if you don’t make your own, unless you want to calculate those estimates separately. Getting healthy and saving money often go hand in hand ;)

Important personal items: I take a lot of supplements for health and managing my anxiety & depression, so I include these in essential payments as well. That can take me up to another $100/mo, depending on how well I calculated how much I’ll use and how many servings are in a bottle etc. Medical expenses for anyone who does not use a FSA or something similar should be taken from income here as well. Perhaps you have a regular prescription to take into consideration?

Loans/regular payments: Lastly, I pay for student loans every month. Other regular payments may include car insurance, insurance premiums, car loans, credit card debt etc. Anything that you are currently paying at the same cost every month, or a balance you are trying to pay off but only managing minimum payments for. I only pay for my scooter insurance once a year since it’s really cheap (another good way to save money if you live in suburban or urban areas and don’t need to travel far or go fast: I get 70mpg for one tank of fuel).

What the heck do I do with this?

After you’ve calculated your income and essential payments (make sure you haven’t included anything occasional or unnecessary, addictions (caffeine, nicotine, clothes shopping, other) are not essential! Subtract all your essential payments from income and voila, that is how much you could possibly save in a month. Do with it what you will, but I highly suggest putting it towards loans or any kind of debt before anything else! Splitting it between debt and savings is not a bad idea either; you want to build up some savings, at least one month’s rent worth, for example, just in case of emergencies, if you don’t have any. All in all, I could expect to save as much as $400 per month, but could only save more if we spend less on groceries.

Not satisfied with the result? Revisit your essential spendings and see if there are things you could go with out or could reduce on. Groceries and utilities are the only varying payments I make per month so being careful about our hot water and stove usage, as well as looking for the best grocery deals are the only way I’m going to save anymore unless we find a cheaper apartment this Fall.

Start saving!

And then we have the really hard part: starting to save. Starting this year, I stopped buying anything non-essential COMPLETELY. I started in November of last year, really, but that ended up just giving me an idea of how much extra crap I kept buying that I didn’t really need to get by. It also gave me a good estimate on groceries and how much is reasonable to spend for two people in this area. Unexpected expenses have come up and thrown off my attempts to save and pay off loans, but every step is progress. This month I will have saved much more than last month and I will split it between loans and savings! Next month, I’m taking a vacation which will throw off savings because I’ll be eating out, but if I’m frugal for the rest of the month, I might still come out ahead, if not just even.

If you’re lucky to get any super-special-awesome extra income outside of regular work, such as a tax return or something large-ish like that (maybe your relatives are really nice and/or you just had a birthday), make sure you use your money responsibly and not as a treat because you’re saving so well. My tax return went straight to a student loan and as a result, my highest-interest-rate loan should be paid off this year if I keep making extra payments towards it.

Good luck and please let me know if you have other tips or questions!

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