Budgeting For Beginners
When I first got married I admit that I had no idea how to manage money. In fact I was blowing most of the money we had in the first week of each month. It became clear pretty early on that I needed to learn about budgeting. After reading books and articles on the subject I came up with a pretty simple budget that I was pretty sure my new husband and I could stick to and all these years later it is still what I use. Why fix what isn’t broken.
I have to say that over the years I have become a huge fan of budgeting. By living with this budget we have managed to save for big purchases and stayed out of debt where ever possible. There are only three things that I personally think are acceptable debts by the way: an education, a house and in some cases a car. I am sorry to say that lovely holidays, big parties or even a large TV just don’t make my list. Those items you save up for, maybe for years. For much of may married life we have lived on only my husbands income while I worked at home raising our kids and from personal experience I can tell you this budgeting plan works. I have still owned a home, travelled, and enjoyed many luxuries throughout the twenty years that we have been married.
So here are a few rules to live by when budgeting:
1.Spend less than you make
This probably seems obvious but it is pretty much the golden rule to budgeting. Other than the areas I already mentioned (education, house, and car) if there isn’t money for it don’t buy it. That may mean skipping lunch with coworkers or waiting to watch that film you’ve been dying to see but never put these things on credit. It just becomes a vicious circle of paying back what you owe from the previous month.
Look at what you make every month, if you work in an industry where pay changes month to month then budget based on your lowest months income. Now make a list of all the things you must pay first. These might include a place to live and the bills that keep the lights on and the water hot for example. Once you have subtracted those from what you make in a month (and be honest and thorough) what is left is what you have to buy groceries, clothes, activities and any luxury items. For example, lets say I make £1500 a month and my rent is £700, my bills come to £150 and my internet is £50 then I have £600 pounds left to work with. So far so good. I bought a reliable used car to get back and forth to work, valid but now I have a £200 payment that comes out and petrol expenses. Now I may be down to £300 and I still need to eat all month. I am not telling you this to make you panic only to point out that every decision you make with money should be made knowing how much you have to live on. Maybe you take the bus for a year or two while you save up and then you won’t have a monthly car payment.
2. Pay off debts as fast as possible
I understand that you may already have credit card debt or a larger car payment than you can afford, it happens. If you are carrying a debt, pay it off as aggressively as possible. Start with the debt with the highest interest rate and put as much extra as you can onto that debt while still keeping up with your minimum payments on your other debts. Once you have paid off the first one then roll what you were paying every month into the next highest interest rate and so on until they are all payed down. Even an extra few dollars can make a big difference and living debt free will be worth not going out for dinner or seeing every movie in the theatre.
Even larger debts such as house or student loans usually have an option for paying them early. If you find that you have some money that is not earmarked why not put it towards those things and get even those payed off months or even years earlier.
The amazing thing about paying off all your debt is that all that money that you had to spend on it suddenly becomes money that you can do any number of other more fun things with.
3. Pay yourself every month no matter what
Get in the habit of paying yourself every month, no matter how little you are living on. Ideally it would be ten percent or more but developing the habit is what I am talking about here. Set up a savings account that you can’t access with your card and put a little in there every month. I don’t care if what you can do is only 5 or 10 dollars put it in there, you’ll be surprised that it will still seem impressive by the end of the year especially if you are not the type of person that has been a saver previously.
Another trick I have used myself and have taught my kids is that if you get to the end of the month and you haven’t spent all your money drop the extra into that same savings account. Live like that for a year or two and you’ll see a big difference in how much you’ve put aside.
My Basic Budgeting Guide
I’ll show you now what my imaginary budget looks like every month, and remember that I have used this simple guide when I made way less and as we’ve made more throughout the years. This is not my actual income or current budget but the formula I use.
A good rule of thumb is to keep your housing cost at around 25-30 percent of your income. Also if I actually had a month where I had this much extra I very likely would have made bigger payments onto my visa or more would have gone into savings. Also I made up most of these bills, trying to remember what kinds of things I was paying when we were just out of school, but the point is that all my must pays are taken out of the budget before any of other expenses. Entertainment in my budgeting world is a catchall that would include eating out, clothing purchases, gifts, or even last minute expenses like an oil change in my car. Anything that is not a one payment and it’s over for the month category has every receipt that fits in it subtracted at the end of the day so that I know exactly how much I have left at any given time.
That is a great start for anyone just at the beginning of their budgeting journey but feel free to drop me questions if you feel I left anything out that you might want to know about. If you are curious about other ways I organise my life you can check that out here.