Tuesday, March 13, 2012

Budgeting for Beginners

Since we’re counting down to St. Patty’s Day, I thought I would do a few financial posts to help us all get our pot of gold at the end of the rainbow. Stay tuned for a variety of money-minded posts—but please keep in mind that I am not a financial advisor.

Even though I don’t consider myself a math person, I find myself constantly budgeting. Friends and coworkers have observed this time and again and a few have even asked how I budget. I thought I would share.

This is a simple budgeting activity and there are definitely more sophisticated methods out there, but I believe this is a very logical place to begin.

First: write down your income for the month

Income:          Paycheck on the 1st = $1,000
                      + Paycheck on the 15th = $1,000
                        Total income $2,000

Second: write down every bill you have.

                        House: $675
                        Utilities: $75
                        Credit Card: $30
                        Car: $100
                        Insurance: $90
                        Phone: $50
                        Television: $50
                        Total bills: $1070

Other monthly expenses:
                        Charity: $200
                        Groceries/household: $400
                        Gas: $50
                        Rotating expense: $30
                        other monthly expenses: $680

Total money out:  1070
                               + 680

Third: subtract the bills from the income

              $2000  (income)
                          -  1750  (bills)
                            $250  (discretionary)      

Fourth: what is left over is your discretionary income. Subtract the amount you expect/want to spend on groceries and incidentals.

Fifth: What’s left over is your discretionary income. Determine what you want to do with it. Save it? Put extra toward bills? Have more spending money? A combination of all three?

Sixth: Consider adding in expenses unique to this month only. Will your car need an oil change? Will you get a haircut? I find that if I put in a rotating expense of about $30, that covers expenses that crop up every few months, but aren’t on my “monthly bill radar.” One month it’s an oil change, then it’s my dog’s grooming fee, then it’s my grooming fee, then the rotation starts over.

Seventh: Divide up your expenses and discretionary income by paycheck. Most people get two paychecks a month. I like to add up all my bills and divide by two, then assign half of my expenses to the first paycheck and half to the second. That why I don’t feel completely strapped during the first half of the month and feel totally rich in the second half. What do you do if all your bills are due in the first part of the month? How can you balance it? First, you can ask to have a due date switched. Most loans and credit cards allow you pick your due date. Or, I also like to do a “set aside.” I will transfer money into my savings at the time I have designated in my budget, then when the actual bill comes in the mail a couple weeks later, I switch the money back and pay the bill. (Or when I used to use a checkbook, I would subtract is from my balance).

In this scenario, $250 a month is discretionary income. Every need is provided for—and probably a few wants are included in the grocery/household budget. It’s now up to you what you do with that discretionary money. I always put some in savings—all is great, but sometimes that isn’t realistic. Sometimes you just need a new pair of jeans or—it always seems to sneak up on me—it’s a gift-giving month and you have to buy something for a birthday or holiday.

I love doing my budget this way and staring at that final number, that discretionary income. I love tinkering around with it.

If I saved it all, I will have $1,000 in FOUR months!!
I could knock out my credit card bill in three months!
Time for a trip to visit my sister!

I love that discretionary number. It’s so full of possibilities, isn’t it?

So this is how I create a basic budget. This method isn’t about aligning the percentage of income you spend on bills vs. retirement vs. housing, etc. It’s honestly about making sure all the bills get paid, planning ahead a little bit, and locating your discretionary income before it vanishes. 

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