Alright, so now that we’ve discussed the basics of a budget (those include determining essentials, non-essentials, and making it zero-based, by the way), it’s time to get into some of the more nitty gritty aspects of budgeting.
When you first take a look at your budget, it can be a little bit daunting. You look at all the things you need and want to spend money on and your head starts to hurt, even when you’re a budgeting pro.
I moved into my very first apartment last weekend and doing so caused me to readjust my budget. I had to up my rent payment and add in things like groceries and utilities. Even though I make a substantial salary and knew that I had plenty of money to cover everything, I still almost had a panic attack. I look at how much I had to spend on things I needed and then looked at what I had left to spend on the discretionary items (ie. those things you want but really don’t need) and it was really scary and didn’t really look plausible.
After arriving home from the leasing office on Thursday night, I sat in the kitchen with my parents and started balling. I was stressed to the max because after reworking my budget with my new rent and other expenses thrown in, my budget looked so tight, I thought there was no way I’d be able to pay for everything. That’s a pretty scary thing to think about after you’ve just signed a 12-month lease on an apartment.
And that’s when my parents told me to sit down, calm down, and breath. Then my dad pointed me toward a wonderful resource as he and my mom headed off on a date.
Percentages are Your Friend
What my dad showed me was a percentage table. It’s definitely not a new concept to me, but it might be for you, especially if you’ve never really budgeted your money before.
Essentially, people for the most part agree on what percentage of your paycheck should go toward different categories of your life. These vary based on your income, whether you are single and living alone, single with a roommate, married, or have kids. There are a lot of different resources that you can easily find online that give you a starting point for how much money you should allocate toward different categories in your budget.
This one from CNBC is pretty simple and very easy — your put in your take home pay and it does all the math for you. This list from Debt Free Destiny gives you three different percentage recommendations.
The most important thing to remember about these things, however, is that they are recommendations, not hard and fast rules. You can use these percentage recommendations as a starting point for developing your budget and raise or lower categories as you see fit because, for you, some of the recommendations may be very high or very low.
When I sat down and did all of my percentage recommendations the other day, I looked at the recommendation for clothing and laughed. I didn’t spend that much on clothing in three months, much less one. So I adjusted the number down and moved the extra money into another category that was somewhat lacking.
Make Your Budget Livable
The next thing to remember when developing your budget is to make sure that it’s something you can actually live with. I spent the last year living with my parents as I hunted for a job, got myself established professionally and personally as a responsible adult, and made sure I was financially stable. Because they charged me a much lower rent that I would find anywhere in this area (yes…they charged me rent, and I’m glad they did) and I didn’t have to pay for things like utilities and groceries, I was able to save a lot of money.
When I revamped my budget to add in my new rent and other expenses, it was really hard for me to let go of the amount that I’d been saving. I somehow thought it was practical to essentially double my rent (and then some with utilities) and add in a few new expenses, still save as much as I’d been saving, and also live and enjoy myself on occasion. The result was a hyperventilating, sobbing me. Not a good thing.
After I looked over my budget with the percentages in mind, I adjusted things, but I still wanted to make sure the budget was practical, so I had my parents (in all their financial wisdom) look over it for me. I wasn’t super stressed and sobbing anymore, but my mom pointed out to me that my budget was still somewhat impractical.
I had stubbornly refused to knock my savings down much at all, and so I was still spread very thin when it came to many of my discretionary spending categories. My mom pointed out to me that part of the reason I had lived at home as long as I had was so that I could save more and that I shouldn’t expect to be able to save that same amount once I moved out. She cut some of my bigger savings categories down a bit, and spread the new found extra money around into some of the discretionary spending categories that were previously looking pretty sad.
It was hard at first, but I realized that my mom was right. Saving it important, but so is not putting yourself on a budget that you’ll never be able to maintain.
Prepare for the Worst
Now it’s time to talk about saving. Everyone talks about it but not a lot of people seem to do it.
Simply put, saving is important. It’s not always fun, but it’s super duper important and you need to make sure you save, not only for the distant future (ie. things like a 401(k) or an IRA), but also for the shorter long term future, the short term future, and for the freak accidents that happen in this life.
Before you start saving for anything else (I don’t care how much you want the new Apple product or the super cute purse at the boutique downtown), you absolutely must set up an emergency fund.
Simply put, an emergency fund is absolutely essential to keeping you from going into crazy debt because of certain situations and keep you from dealing with major stress every time an unexpected expense comes up.
An emergency fund is what it sounds like — a fund for emergencies. It’s money you don’t touch at all unless it’s legitimately for an emergency. It’s difficult and sometimes you have to really discipline yourself to make sure you don’t spend all of the money on the latest gadget or fashion trend, but it’s really worth it when an emergency pops up.
According to Dave Ramsey, who is quite well-known for his expertise in getting out of debt (from his own personal experience) and building wealth, a fully funded emergency fund consists of 3-6 months of your expenses. This means that an emergency fund is going to look different for every single person and family. It will be more the higher your expenses are which means my emergency fund as a single young adult is very different from the emergency fund my parents have set up. But all emergency funds do the same thing — they give you a buffer for when the worst comes unexpectedly.
In January, I was in a car accident. It was a pretty minor. I didn’t see a car when changing lanes and ended up hitting the side of a Ford Explorer with my little Toyota Camry. The result wasn’t pretty. The car had nearly $2,000 in damage that I definitely had not planned on spending. On top of the damages to the car, I had to pay for a rental car while the car was in the shop. It was a pretty hefty bill and one that would’ve freaked and stressed me out and turned me into a giant puddle of tears pretty quickly except for the fact that I had already begun building my emergency fund. It wasn’t quite to the 3-6 month point yet, but I had well over $2,000 saved. That meant that I was able to repair the car and pay for the rental car without having to worry about how it was going to affect my other expenses for the month.
A couple of months ago, I had another surprise. I took a trip to the emergency room after having difficulty breathing and chest pain only to discover that I have Situational Anxiety Disorder, which just means I get more anxious than most people do in certain situations. The end result of that surprise trip to the emergency room was a $600 hospital bill. Definitely not something I was expecting to have to pay either. But I had my emergency fund all set up, and so I was okay.
In one of the sessions from Dave Ramsey’s Financial Peace University, they show a video where a guy goes out on the street and asks random people what they would do if they had a $5,000 emergency. The large majority of them said they would either take out a loan or get another credit card. Essentially, they’d have to go into debt in order to pay for the emergency.
That’s scary to think about because emergencies do happen and it can be really difficult to get out of debt sometimes.
So before you start saving for anything else, set up your emergency fund. Take it from me, it will greatly relieve your stress when something breaks or someone gets sick. Instead of freaking out about missing your rent payment or not being able to eat for the month, you’ll know that it’s taken care of because you prepared in advance.
Have you ever used the percentage method to set up a budget? What about an emergency fund?