Last month, I wrote an article for Chelsea Krost on how to kickstart your personal budget. The advice I gave is pretty simple: a personal budget needs to be personal. You can’t just grab a random budget worksheet from the internet and expect it to stick. Instead, you need to answer three questions:
What do I need to spend money on this month?
What do I want to spend money on this month?
These questions are purposefully vague – I intentionally wanted it to be the opposite of every other budgeting advice you’ve ever heard, which puts very little focus on what you find to be important.In this article, I’m going to focus on helping you answer the first question: what do I need to spend money on this month? While some of these categories may be obvious (actually, I hope they’re obvious), I’ll also be going through some tips and tricks on how to best manage these categories.
Probably the most important categories on this list, as far my high school understanding of Maslow’s hierarchy of needs is concerned.Whether you rent or own your home, you probably have some sort of monthly payment. This should be easy to budget – your rent or your mortgage payment should be the same from month to month.It can be difficult to budget for utilities, since both electricity and natural gas charges are known to vary wildly from month to month. In the summer, for example, you could be paying for an air conditioner (or at least a few fans), which can jack up your electricity bill by two or three multipliers.Your best bet moving forward is to look at your past bill history. That will give you a rough estimate of what you can expect for a particular month. If you don’t have any past bill history, plan on spending more in the winter and summer than you would in the fall or spring.In some states, you can get your energy through an ESCO (energy supply company). Usually, your utility company will charge you a variable rate that changes depending on a variety of factors, including demand. ESCOs can provide electricity and natural gas at flat rates, which can potentially help you save money and create a more stable bill. I’ve used an ESCO for the last year, and I’ve shared how much money I’ve actually saved by switching.I’m also going to include your cell phone bill and your home internet as utilities, but not your cable TV bill (if you have one). Cell phones and home internet access are usually seen as needs, especially if you’re working any kind of office job. However, you don’t need cable, and while you can prioritize it once you get to asking what you want to spend your money on, it shouldn’t be seen as a utility.
There’s a good chance you have some debt. If you went to college, you started your relationship with debt at age 18 with a nice, fat student loan. You might have an auto loan – despite promises of autonomous vehicles, auto loan debt is out of control. There’s a good chance you have credit card debt, as well.(We’re not going to count mortgages under this category since we already covered it. But yes, your mortgage is debt!)There’s also a good chance that you wish the chunk of your paycheck that went towards paying off debt went towards something else, instead. When creating your budget, you need to put aside enough money to cover your minimum monthly payments. Ideally, however, you’re going to put even more money aside to help pay off that debt even faster.To help pay off your debt as quickly as possible, we suggest using the snowball method. With the snowball method, you pour all of your extra income into one debt at a time while paying minimums on the other debts. Once that first debt is payed off, you take the money you were putting towards that debt and spend it on the next debt. So on and so forth until it’s all gone.
If you’re not already cooking for yourself, now would be a great time to start. Eating out for every meal (or getting delivery) is a total drain on your budget. It’s much cheaper to buy ingredients and make your own meals.That doesn’t mean you still can’t eat out, of course. However, it should be viewed as a treat, not the norm, and you should put it in a separate budget category.Also, going back to that hierarchy of needs – food, for whatever reason, is pretty high up there. So make sure you’re spending enough on groceries to stay full and stay healthy.
Whether it’s a train ticket, a subway card, or gasoline, you need to pay for transportation every month. If you’re paying for a monthly pass on public transportation, this cost is stable from month to month.But what if you own a car? You probably have a pretty good idea of how much you need to spend on gas, but make sure to budget for travel that goes beyond your normal commute, like driving out to a concert or other event. And because gas prices are volatile, you might want to budget a few more dollars into this category to cover a possible price increase. If you don’t end up spending the money, it will roll into next month’s gas budget.You should also put money aside for car maintenance. An easy way to budget for car maintenance is to take the total sum of maintenance costs that you paid last year and divide it by twelve. That way, you can roughly budget enough to pay for your annual maintenance costs. However, since your car is a year older, there’s a good chance it may have more maintenance needs this year. If you have the cash, put some extra aside so you don’t get blindsided.
There’s a good chance that you have insurance for something. Have a car? Car insurance. Rent? Renter’s insurance. Own a home? Homeowner’s insurance. Have a human body? Health insurance? Live and breath every day? Life insurance. Work? Long-term disability insurance. Mr. Fluffles? Pet insurance.Your insurance premiums should be easy to budget for, as they stay the same from month to month. If you pay your insurance premiums annually, break the payment up into twelve equal amounts and put money aside for it every month.
If you’re anything like most Americans, you’re probably not saving enough. Don’t worry – you don’t need to suddenly put all of your paycheck away for retirement. But you do need to be conscious of it and come up with at least a vague plan.As far as retirement goes, you should start putting money away either in a company-backed 401(k) or your own private IRA. How much money? Most financial advisors will tell you "as much as you can," or about 10 to 15% of your paycheck as a general guideline. Don’t feel discouraged if you can’t save that much yet – save what you can and revisit retirement once you’ve paid off consumer debt or cut costs out of your budget.You should also be putting money aside for an emergency fund. Most financial advisors will suggest having an emergency fund that could cover six months of expenses if you were to lose your job.
Obviously, these aren’t the only things you spend money on. We haven’t touched Netflix, clothing, weekend bar hopping, coffee, video games, concerts, or any of the other multitude of things you might spend some of your paycheck on.This doesn’t mean those categories aren’t important! They’re just not your basic needs. They’re one level up. After taking care of your essentials, you can afford to spend on your money on anything you want. Yes, that means a $60 video game or expensive latte.Just remember that you need to limit yourself to the money you actually have. Focusing on what you want without keeping it in context of the money you have will lead to disaster – most likely, mounds and mounds of credit card debt.Another important tip: budgets aren’t a "set it and forget it" kind of thing. Your budget should be constantly changing depending on your needs and wants. For example, you don’t need to put $60 aside every month for video games, but you might want to do it occasionally, like when Star Wars Battlefront comes out. During other months, you might spend that $60 on clothing, coffee, or a night out. Or maybe you can afford to spend that $60 on video games because you’ve finished paying off your student loans.No matter what, remember not to stress too hard. Your budget is not supposed to a task master – it’s supposed to be a tool that will help you lead a financially responsible life.
Image: Celia Alba
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