A budget that is strapped to the bare bones will struggle to perform its proper duties. If you think about a runner who has trained hard and has eaten the proper foods before race day, it wouldn’t shock you to see it outperform those who did not. Most people do not take their finances to the runner’s extreme. There may be a budget plan, but it is not fine-tuned or run with precision. Money management is your budget’s marathon. Every day counts. There must be a strong base money plan in which the rest will work accordingly. The runner didn’t decide to train for a week before the big race. There is time, planning and practice needed to get into shape.
Shaping the budget
Income plays an important role in budget management. Consider it the food used to energize your plan. Your net income is the amount of money brought home after taxes and deductions have been removed. A personal budget must run off of this final number. If not, you risk the ability to cross the finish line at the end of the month. Racers will at least have an opportunity to recoup and adjust their training regime. Households automatically begin a new race the very next day and must move forwards with our without the proper fuel. It’s best to initially create a great budget plan that will keep you crossing the finish line month after month in good condition.
Set up guidelines for your major expenses.
Your income must address:
The largest monthly expense is housing. How much house you buy should depend on how much money you have to spend. Financiers would suggest targeting this portion of the budget at 25% or less of your monthly net income. While shopping for a home, you may have noticed that the broker approved a loan for 36% of your take-home income. Loan approval and accepting the offer are two different things. Make a smart money decision and borrow the least amount possible. Living with a bare bones budget is risky. A runner may train for a 26 mile marathon, but it doesn’t mean that 26 miles are run every day. Too much will burnout your body and your budget.
Homeowners need to take into account:
These costs are ongoing. If they all don’t happen in one month’s time period, they are bound to come up at a later date. It is best to keep that 9% difference to yourself and save it for when they do occur.
Renters should keep their costs below 35%. Depending on the specifications of the lease, you may or may not have to pay all utilities. It is important to invest in renter’s insurance.
If you are responsible for utilities, keep 15% of your take-home income set aside for them each month. Depending on where you live, you may have more expensive winters or summers. During the down months, it is important to set aside money to cover the weather inflated costs.
Set your transportation cost to 15% of the budget. Don’t buy too much car if the maintenance and repairs are going to push you over the limit. This amount must include the loan or lease payment, insurance, and the previously mentioned maintenance and repairs. Set money aside each month to cover yearly registration costs. The more prepared you are for the inevitable, the better.
A savings account should receive a deposit of 10% of the take-home income each month. How much you should save and what you should save for deserves its own post. If you can aim for 10% and at least get the ball rolling, you are on a good path.
A quick savings tip
Some of you may have remembered growing up with or have used in the past, the envelope system. You took actual money and placed it into separate envelopes for each category. As you took money out, you recorded it on the actual envelope. At any given time, you could see how much remains and where the money was used. Online banking offers an upgraded version of this system. Once you have a basic savings account, most banks will allow you to set up sub-saving accounts. You can transfer money to specific sub-accounts. Give each account a name for easy handling. You have the same access to each account, easily transferable and managed with ease. Automatic deposits will also help you make sure you are setting the appropriate amount of funds aside each paycheck. I have mine set up with Chase bank. There is no added cost for the sub-accounts, but I do have to keep track not to go over the allotted monthly withdrawal limits. Talk to your local bank manager to find out more about saving sub-accounts.
The debt budget should only take up 10% of your income. With student loans, credit cards and medical debt the 10% will fill up quickly. This is a tough category for many households. It’s very important the credit card debt does not climb over 30% of the credit limit in order to fit into this tight budget percentage. If your debt tops the allotted 10% of income, you will need to cut back in other areas until it becomes more manageable.
You will want to tackle this budget category immediately before it gets further out of hand.
Everything else category includes food, gas, clothing, entertainment and medical needs (i.e. insurance costs and prescriptions). There is only 25% of your budget left and it all needs to fit. This area of the budget is the most flexible. There are lots of things you can go without and cut back on in order to make it fit.
Limit unnecessary driving
Shop with lists
Limit gift purchases
Have a clothing budget
Find inexpensive or free activities
Take preventative measures to keep your health in good shape. Don’t procrastinate calling your doctor or dentist when symptoms first occur.
Once your budget has adjusted to the training, it isn’t time to stop. Focus your attention saving more. Set money aside for retirement and funding your child’s college education. Talk to a financial adviser for more information. Set your goals, make a plan and stick to it.