Setting a budget is fairly easy. It’s the implementation and follow through that seems to derail most. Budgeting doesn’t have to be difficult. Budgeting is a great exercise in financial discipline as well as an excellent use of your time. The most important part of budgeting is learning to stay within your means. If you don’t have a budget, it becomes very easy to rob Peter in order to pay Paul. Budgets establish boundaries and those boundaries force you to be financially disciplined.
Budgets are designed to allocate the money you have, not the money or lifestyle you wish you had. Don’t kid yourself. Follow these simple steps to setting your budget and sticking to it.
1. Know how much money you have coming in the door every month. Use this number as your starting point.
2. Determine what % of your monthly income you want to set aside for your Retirement & Savings each month. I always subscribe to the “Pay Yourself First” method. If you’ve already paid yourself, then later in the month when you are tempted to spend money on wants and not needs, it won’t come at the cost of your retirement and savings goals.
3. Divide the remaining amount of monthly income among the following areas (feel free to get more detailed with your categories): Housing, Utilities, Food, Transportation, Clothing, Medical/Health, Personal, Recreation, Debt.
Here are some suggested guidelines for what percentage to use in each of those categories:
• 10 -15% to Pay Yourself First (Retirement Savings) – this includes 401(k) & IRA savings
• 25% – 35% to Housing
• 5% – 10% to Utilities
• 5% – 15% Food
• 10% – 15% Transportation
• 2% – 7% Clothing
• 5% – 10% Medical/Health
• 5% – 10% Personal
• 5% – 10% Recreation
• (Hopefully Zero)% Debt – This does not include your mortgage (see housing)
Make sure every dollar of monthly income is accounted for. Budget down to every penny. Once you’ve allocated your monthly income, divide it up. I recommend using the envelope system. Aside from your Retirement Savings & Housing, envelopes provide a great method for making sure you spend what you have. That’s budgeting! Make the amounts in each envelope last to the end of each month. Budgeting is an ongoing activity. Sometimes your initial budget will need to be tweaked because it may have been too rich in some categories like Transportation or Clothing and too lean in others like Food or Recreation. Whatever minor tweaks you make, keep the main goal in mind: “Live within your means” and hold yourself accountable to be financially disciplined.