How do you handle your spending? Is it an aimless stream of expenses, or do you have a plan for each month and year? Sometimes a budget is hard to follow, especially if it is inspired by a particular event, such as a move, a raise or a layoff. Or, as happened to me once-it was someone else’s idea that I have a budget. First: words matter. I prefer the term spending plan, as I think when you are planning your spending, it implies more forethought and care for yourself. Be proactive!
The hardest part for people is to record all income and spending. No, I am mistaken – the income part is usually easier than the spending. When recording income, include wage income, as well any other sources along the way (rental income, refunds, rebates, gift cards, checks from any side gigs etc.).
Now, you are ready to record your spending (you can use online tools such as mint.com) or check your bank or credit union-they may have a free online solution already integrated into your accounts. Or use a notebook, a napkin or your bank statement. Low tech is better than no tech.
Which expenses are fixed? These may include rent/mortgage, insurance, tuition, commuting costs (tolls, parking, gas), groceries, utilities, loan payments (student loans, car payments, minimum on your credit card bills, if any), tax withholding, child care, pet care or babysitting costs, condo fees.
Which expenses are variable? These may include eating out, any phone/internet/cable costs above the basics, paying extra on any loans or credit card bill, clothing, gifts, personal care, charitable contributions, and entertainment. How do you handle vacation spending?
Next, look at some ratios and categories more closely:
- Are your residence costs less than 50% of your income (old guidelines were 33-35%)
- Of your food costs, how do the amounts play out between groceries, eating out and take out?
- What about the cable and cell phone bills, and other utilities?
- Savings Hint: this percentage should be above zero and should be at least 5% of your gross income. 10-20% is better, but is out of reach for many people. You can plan to gradually change that number.
- Investing (can include workplace retirement savings, or other regular investments)
- Are you paying for anything you are not using? Review those automatic debits! (gym, movies, credit monitoring that you don’t need)
What if you have exceeded your entertainment plan for the month and it is only the 15th? How will you address that-switch funds from another group/bucket/envelope or stop going out until the next inflow? It’s also good to know your habits-like are you the kind that loves to show your generosity by buying a round for your friends? Can you cook more at home, or bring your lunch to work a couple of times a week?
If you spend $12.50 less per week, you can add $50 to your rainy day fund, or set up a monthly mutual fund investment.
An extra $50 per month now towards your credit card balances or student loans pays off by reducing interest paid.
If you quit smoking, you can save money by not buying cigarettes and may save on your health insurance.
Try it yourself with a savings calculator.
How much do you need to earn to live in your city? Here’s a calculator for Washington state. (Available in 11 languages)
Another filter to view spending through is Needs and Wants. One split I recommend frequently is 50% needs/ 30% wants, and 20% savings, as found in the book All Your Worth by Warren and Tyagi. This split acknowledges that you have needs and wants, plus should urge you to save more.
A spending plan only works if you use it, track the inflows and outflows, and check the plan regularly. You can plan for how you adapt to changes in circumstances in advance. Sometimes it is useful to hold yourself accountable to your plan by reviewing it with another person, like a financial planner. I have a client who is using me as the person to whom she is accountable “for executing against her spending spreadsheet”, in her words. Will you spend by choice, or by chance?