If you read my initial post on budgeting, welcome back. If you are just joining the conversation, today we are going to look at some of the common things that one should look at when creating a realistic budget. My approach to budgeting is to look at everything you spend, even the discretionary spending, and account for these items.
People often have a negative connotation to budgets like we have a negative feeling about dieting. It is something bad we have to do but don’t really want to. Lets change that thought process and think of it as a lifestyle choice and a way to make sure we can afford to have fun as well as be responsible.
I like to organize my budget in categories, starting with what I must spend to live. Then I look at things that you have made a commitment to pay but might be optional if you don’t have a contract. Next, I look at things that I need but how much I spend is flexible, like food. Next I look at bills that I pay periodically but should save for on a monthly basis. Lastly, I look at how much is spent on purely discretionary spending, like entertainment or eating out. If anything is left, this is what I can save for large purchases or retirement. We will explore a bit of each category.
To start, look at items like rent/house payment, electricity, natural gas, garbage pickup, and water bills. It is difficult to get away from these items unless the place you live includes utilities in the rent payment. Other items I would include in the “must spend” category, but may be optional for others is car payment, and insurance.
At this point in the budgeting process the goal it to identify what you really spend and decide if it is mandatory (like you have a loan and must pay it) or is it optional. An example of an optional bill that many people think of as necessary is internet. Unless you must have internet for work or school chances are it is optional. That is not to say you can’t have it, just realize it is a choice.
Speaking of internet, this usually falls into the commitment category with other expenses like gym memberships and cell phone plans. I signed a 2 year agreement with my current cell phone carrier but when that is over I can choose a less expensive carrier or stay where I am. I have gig speed internet but if things get tight I can cut down on it…okay it might make me sad but I can do it.
The flexible spending category is often a hard one for people to get a grip on. Some things feel so necessary that we often forget there are ways to change if we want to. For example, think about how much we spend on groceries. We all need to eat, but do we need to buy a steak every week or can we do every other week. Only the individual can answer that for themselves. As I have said before, no judgement….just know this process is designed to get a grip on where the money goes. Think to yourself, what other things do you need but can economize on if you want to save.
The next category is one that many people do not think to include in any form of budget they have done in the past. Things we pay for periodically but should save for monthly. A good example for my budget is personal property tax on my car. My state charges me $400 a year for the privilege of owning a car (another rant for another day). I can either try to take a $400 hit in the month it is due, and if you live paycheck-to-paycheck this is hard, or I can save $34 a month and have that money waiting for me each year. I choose the later. Each month I treat my saving for periodic spending like a bill and transfer that money into a savings account that I don’t touch unless I must, i.e. for those bills or an emergency.
The last category is the fun one, What do we spend to have fun things in life. Geek time, I love my World of Warcraft account. I am going to spend that $15 a month until such time as I cannot afford it or the developers stop making the game. If I am going to spend it each month I need to account for it. In this category think of things like, getting a daily coffee, eating out, going to the movies, streaming music services, or saving for a vacation. Of course none of these lists are all inclusive.
If you are looking to get a grip on your budget or just refresh the one you have, spend some time thinking about what you really spend and what category you would put those items in. Hopefully, this can help someone out in the big, wide world.
UPDATE: This is the first post in a planned series. I hope you like the post and series, if so there are additional posts in the series already published. Respectful comments and discussion is welcome.