Pagemonth Budget
plan ahead to get ahead
 
   Home      Budgeting 101

 

 

 




 
 
 
 
  
 
 
 
BUDGETING 101
 
 
 
 
 
Why Do You Need A Budget?
 

Personal finance books all recommend that individuals and families establish a budget.  But how much is recommended for housing? food? entertainment? transportation?  And what happens when there isn’t enough income to pay for  expenses?
 
 
Before committing to any budget, it's useful to simply keep track of your income and expenses for a few months.  It's not budgeting, but it shows your "financial experience" pattern, what you have a tendency to do if you don't foresee what you will earn and spend through the year.  It's often based entirely on the present:  when you get paid, you pay for what you must and spend the rest quickly because you feel flush.  Maybe you go out to eat, buy a new TV, or treat yourself to another "reward for your success."
 
 
But before you realize it, other bills arrive, the car breaks down and has a costly repair, or another emergency arises that you couldn't have imagined.  Suddenly you find you don't have enough to do more than squeak by.  Maybe you borrow from lenders, friends, or relatives.  Maybe you rely on credit cards and take out more than you can pay back, hoping that somehow your "luck" will change or you'll win the lottery.
 
 
 
Guess what.  That’s probably most of us.  We sort of know we’re not doing very well at managing our money or living with what we can afford.  We see others seeming to be living the good life in luxurious new homes and driving hot cars and think we should be, too.   We’re the ready victims of false expectations, because we can’t know what’s coming.
 
 
That’s why a budget plan of almost any kind is much better than none at all.  Some young people begin with a cash envelope plan in which they create letter envelopes for the rent, the electricity, the phone, etc., and after cashing their paychecks they put aside enough cash in each envelope to be able to pay their bills that month.  They may not even have a checking account, and they may actually walk to the phone company office and pay cash.  Or they use the cash to buy money orders and send those.
 
 
Finally they get a checking account and begin to get a little bit of control.  If they maintain a checkbook register, they can see their deposits and payments in some clarity, and the monthly statement from the bank confirms their numbers.  Today with more people paying bills online and keeping track of their bank and credit card balances through online sites, their view of their finances is vastly more current than waiting for the bank statement to arrive once a month by mail.  In other words, they can more clearly visualize their financial experience and begin to avoid upsetting surprises.  That's why all of us need a budget, so we can adapt to our means and know what we can probably afford and when.  Planning a realistic budget and updating it regularly for actual experience enables each of us to quit dodging the bullets of experience alone and begin to plan ahead.
 
 
But then what?  Maybe your end-of-month balance for August was always a deficit, such as teachers often face if they don’t get paychecks over the summer.  This spreadsheet can warn the user that’s coming, and knowing that’s coming is the most powerful incentive I know to doing something to adjust other spending and earning to make sure it doesn’t happen, that even if you spend up to the amount you budget for that July vacation trip, you’ll still have a healthy “buffer” to get you through August and into your regular paychecks again in September. You know they’re coming because you have your contract.  It’s just a matter of budgeting your money till you get paid again.
 
  But let’s assume you have a reasonably regular job and your husband, wife, or partner works, and you’re trying to support a growing family.You live in an apartment, condo, or house and pay monthly rent or a mortgage, have a phone and probably a cellphone as well, a credit card or two, are paying off at least one car loan and perhaps some other debts.  You try to eat out once a week at least and take in a movie or show, and try to get away from it all with at least one vacation trip, however brief.  You’d like to save also,  but although you have a savings account, you don’t contribute to it regularly.  You’d like to retire someday but are hoping Social Security plus your company retirement account will be enough.  If not, you’ll keep on working, you guess.  There’s really no plan B.

 

Lots of adults fit this profile.
 
 
 
How much should you budget?  and for what?

 
 
 
Most credit agencies, banks, and other financial advisors are glad to help you determine how much you should budget based on your individual circumstances, and for what categories of expenses.
Typically such financial advisors suggest you break down your expenses according to the following general percentages of your discretionary income (net income after deductions):
 
 
pagemonth suggested categories
Housing and utilities 
25% 
101-106 
mtg./rent, electric, water, phones, cable, furniture, maintenance, repairs, other
Food 
15% 
110/130
cash, groceries, meals out
Clothing 
5% 
125/135 
clothing 
Medical 
5% 
121/131 
medical insurance, doctors, hospital, prescriptions 
Transportation 
15% 
107-109 
fares, car payments, insurance, gas, 126/136 repairs 
Savings 
5% 
112 
savings 
Debt payments 
15% 
111 
credit cards, loans 
Other 
15% 
120/130 
miscellaneous 

 
 
How Fixed Are These Recommendations?
 
Not fixed at all.  Everyone’s situation is different, and everyone has different goals and needs.  Some need to save for college or to buy a house.  Others plan a move or career change.  Some with several children may need much more for clothing.  Some need more funds to invest, care for others, or start a small business.  The differences are as great as the number of people.  You shouldn’t view these recommendations as what you should be doing but as general guidelines credit counselors and financial advisors might expect to find. 
 
 
But having said that, if you find your are spending more than 20% on installment loans, for example, it might need to change because you’re likely paying a lot of unnecessary interest.  See if you could wait to buy that new couch or entertainment center, or find a good used car instead of a new one.  People typically spend too much on credit cards; if you can consolidate them at a lower interest rate, do it.  If there’s any way you can pay off your car loan or any installment loans, do it.  But use your budget to see what you’re spending and for what each month, and consider these percentages many people recommend.  If you’re way out of line—spending over half your resources to live in a place you can’t afford, for example—consider ways to cut back.  You can adjust your Pagemonth Budget categories and amounts to suit your particular needs and goals with more confidence than by just guessing what would happen if--?