personal finances — October 07, 2013

Living Within Our Means

by Bob Williams

keeping a personal budget

So, you’ve made the big break from Mom and Dad, and you’ve moved into your first apartment. Nice being in a place of your own, isn’t it? We think we’ve seen those cinder-block-and-plank shelves before somewhere.

Just curious – seen any of the bills yet? Oh, don’t worry – you will.

In fact, that’s why we’re here: To help you learn some tactics that can keep you protected from the Wolf at the Door.

Do You Need a Budget?

The quick answer here is, “What, you gotta ask??” Of course you need a budget. No matter if you’re single, married, with or without kids – if you’re paying the bills, you need some sort of way to navigate your financial landscape, no matter how simple it may appear.

A budget is your tool to anticipate what you owe every month in bills – and to judge how much you’ll have in party change afterward. Never mind Congressional spending, the REAL fiscal cliff is the one where you can’t come up with rent money this month. A budget can help you to stay clear of the edge and still enjoy the view.

The good news is there are different kinds of budgets so that you can pick one that suits your style and sensibilities. When it’s a good fit, you’ll stick with your budget – and it can guide you for many years.

Just Don’t Go There

No matter which type of personal budget you may choose, we have some advice on something you should avoid like the plague. Do not use a credit card to “take care” of your debts when you can’t. Unless you budget for that higher card payment, the interest charges will start eating you alive. Then, you’re on a downward spiral – and it will NOT be a fun ride.

Now, let’s get back to the business of budgeting.

On the simple side, you can’t get much easier than the system we used when we got our first place. Way back in the day, we’d cash our paycheck and bring the cash home, sit down in the middle of the living room floor and parcel out the proceeds. We used envelopes, marked with the various monthly bills and their amounts. After all the “must pay” envelopes were fed, we might have lunch money left over – or we might not.

So you might have an envelope for Rent (since that’s a recurring amount) and another one for a general Food category (since that one will vary), and yet another for Transportation (which can include things like gas, repairs and mass-transit costs). You would want to determine an amount you can spend in each category each month, and that’s what goes in the envelope. When you’ve spent the cash in the envelope, you’ve reached your limit in that category for the month.

This is admittedly old-fashioned, but it is simple and it works. The bad news is that it forces you to deal with cash. There are, however, other options that may fit you better.

Keeping with the old-school theme, you could create your budget using nothing more than pencil, paper and a calculator. First, add up your pay stubs and figure out just how much you make after taxes every month. Include estimates of any side jobs, moonlighting or self-employment work. Next, add up the expenses you know you have every month – the expenses that don’t change: car payment, rent, insurance and the like. Subtract those expenses from your total income. What’s left is what you’ll have to pay the expenses that vary from month to month. Hopefully, there IS something left at this stage.

Next, you’ll need to come up with some sort of spending limit for the other stuff, those variable expenses like groceries, gas, utilities and so forth. For a clearer picture of your expenses, subtract your variable expenses and your fixed expenses from your total income. If there’s anything left, this is what you should have left to “play” with every month. We would advise against simply using all this as party money every month. Consider stashing a portion of it into a savings account – or paying extra on your car note to get out from under those interest charges.

One option is to use percentages instead of fixed amounts. This comes from the folks at Forbes Magazine, who suggest this method to allow for trade-offs in your monthly spending, while keeping you on track and out of debt. Remember the numbers shown are the percentages of after-tax total income.

They suggest limiting Housing to 25–35 percent; Transportation costs to 5–15 percent; Food (which includes groceries and eating out) to 10–15 percent; Personal Care (including clothing) to 5–10 percent; Health Care (which includes insurance premiums) to 10–15 percent; Loans (this heading does NOT include car payments) to 7–15 percent; Utilities to 4–7 percent and Entertainment to 1–5 percent each month.

Notice that savings is not one of the categories. It should be, however, if you don’t have any debt to repay. Forbes suggests a young person on their own should tuck away 10 percent of their total income to an emergency fund of some sort. And they should do it for a year. What’s an emergency? A car wreck. What’s not? Your iPad dies. Get the picture?

For the Geek in You

For those who would like to budget but need something a little more techy, a friend told us recently about a website that allows you to do it online and for free. Mint.com has a very attractive interface and offers helpful graphs, expense tracking – even mobile apps.

Once your financial account is linked to Mint, the service automatically tracks your spending and categorizes your purchases – so you can see in a click just where your hard-earned smackers are heading. The site has 128-bit encryption and uses the big web verification services. And since the site is read-only, no danger of having your finances moved elsewhere through Mint.

But whether online or on paper, you need to have a budget. You wouldn’t drive into unknown territory without a map, so why venture into the financial wilderness without a plan?

With a budget you can live with, you won’t be one of those people who suddenly wakes up and wonders, “What do you mean I’m broke? I still have checks left!!”

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