Budgeting 101 Part One (oh yeah there's part two)

So you are here, looking for some answers for what you do with all your dolla dolla bills? Good for you good for you, I'm excited for you too! I'm sure you have some questions for me, and if you don't find yourself getting answers, feel free to send me some input, I will try to answer them.

This post is exactly what the title is, so let's not waste time and get into it, although I do suggest you break out your pen and paper if you want to see things work out while you go through this. Seriously, after this post you should literally have a budget, I'm that cool.

First we need to gather all together the things that we must pay, or what we usually call needs. Needs usually include things like rent, car payment, insurance, utilities, groceries, any loans or debts we pay monthly. These are things that we need to pay in order to survive or avoid any bad consequences (late fees and fines). These payments are divvied out first because we know we're going to pay these set amounts every month. Let's have an rolling example as I run through this budgeting process.

Hypothetical Needs:

Rent:                     $750

Car Payment:       $200

Car Insurance:      $150

Utilities:                 $50

------------------------------   
Total:                $1150


Next, we can think about savings. Having a good fallback if you find yourself in an emergency (flatscreen TV is not an emergency haha) is a good idea. Even if no emergency is present, knowing the amount of money you must spend per month helps us determine how much we want to have on hand in order to survive X months, if we come to a sudden move or job change. If you already have this much in your bank account or savings account, then you may not have have to mind this so much. This is not something that you need to come up with immediately, but if you don't have an emergency backup it's good to start putting some of your savings into that.

Hypothetical Emergency Cushion:

3 months:        $1150 x 3 = $3450

6 months:        $1150 x 6 = $6900

etc....



What we really want to go towards is a rolling, static amount of savings per month. Why? Well, we not only grow our cushion more, we can also later decide invest and let our money work for us. Keep reading, you got this.

Usually, it's good to save 20% of your net paycheck per month. Net paycheck is the amount of pay you get after you get your taxes taken out of your whole paycheck amount. Net pay is also known as take-home pay, because that is the amount of money you get to take home, and stuff in your bank account. Read more about it here. If you want to be a saving superstar, you can do 25%. Hell even do 30%! But let's stick with the nice 20% here first.

Hypothetical 20% Savings:

$3000/mo. x 0.2 = $600
--------------------------------------------------------------------

Running Total:  $1150 + $600 = $1750

So how about that left over money, huh? If you're lucky enough to have paycheck leftovers, that's great. It's like leftovers you can eat for lunch. I'm hungry don't judge. You can use this leftover money however you want. You can spend it or save it. Whatever you want. Really, I'm sure. As long as you're not breaking the law though...hah.

The 50/30/20 Rule

The 50/30/20 rule is applied above. Let me explain; The simple rule allows for you to start out with a division. Here, 50% of your paycheck applies to the needed expenses as pointed out above, 30% (ideally) for your free spending, and 20% as savings. Once we've figured out how much each category is, we can then go about adjusting each percentage based on what we have.

Hypothetical Division:
50% of $3000 = $1500 for needs expenses
30% of $3000 =   $900 for free spending
20% of $3000 =   $600 for savings

From the example we have, we see that we have less need expenses than we have budgeted out. That doesn't necessarily mean you must find something to spend it on, you can always save it. And even though I call it "free spending" it also doesn't mean you must spend it all either. But you can and you still don't have to worry about paying your bills. I am a big advocate for saving and investing. You'll see in many of my future posts that talk about investing that I'm obsessed with having money work for you. But for now, lets keep going. Follow what math that I've done above and you'd know how much you have to save each month, how much bills you have to pay, and how much you can spend on anything!

What if my needs expenses are greater than 50%?
I get it, not everyone is going to have perfect numbers. That's one reason I mention adjusting the percentages. So there are two things you can do.
1. Decrease your free spending amount first, never your savings. Saving is essential for us to have a comfortable fallback and is a last resort category. Never ever decrease savings if you can help it. Using your free spending money to pay your bills might mean you can't buy as much fun stuff, but that also means you are free from being behind on your bills and potential late fees.
2. Decrease your needs. I don't mean to starve yourself, or to not pay your rent, but sometimes we can find cheaper alternatives to our groceries or cut down on internet speed for a while. Sometimes we can let in some natural lighting rather than using the lights. Sometimes, we could find a cheaper place to stay. List out and look at the things you have pay for. Could you deal with a little less of something for a little while?

I grew up with my parents dressing us in thicker clothing in the winter, and intermittent heat to save money. To this day, my parents still do this (except dress me), even though they don't need to.

I hope this helped you establish your first budget and first little step towards financial stability and comfort. In the second part, I hope to go more into detail about why saving, with the power of compounding, is such an important thing. Until then, see what else you can read from here.



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