When it comes to your money, you should know where you are, where you’re going, and how you’ll get there. This all starts with the dreaded B-word, budget. The very mention of the word budget sets off a feeling of confinement, restriction, limitation and loss of control. I admit there is a sense of confinement, restriction and limitation associated with managing money, but it has nothing to do with a budget. What confines, restricts and limits us is the amount of money we make—our income! So if you want to spend more, have more, and save more without sacrificing your lifestyle, you simply need to make more. A more formal definition of a budget would be a plan for spending, saving, and investing money. The importance of making a budget and sticking to it is to save for future goals while meeting present obligations.
Nobody wants to be tied down and confined—especially when it comes to our money. Most of us hold the position that it’s my money and I’m going to do as I please. You showed up to work, busted your butt and earned it. I’m with you—do as you please! Just do it on purpose with a plan that includes your needs, goals, desires, responsibilities and commitments. Otherwise doing what pleases you today without planning can be the catalyst for what will destroy you tomorrow—financially speaking.
Now that we have a basic understanding of why a budget is important, how do we know that our budget is something that needs to be followed or something that needs to be changed. If you’re barely making it month to month or have “too much month left at the end of your money,” the telltale signs are evident—something has to change. But what is that something? How do you quickly identify the area in your budget that’s causing you problems? What if the telltale signs are not so apparent? You pay your bills on time each and every month. You have a few dollars left after the dust settles. Are you moving in the right direction?
You manage to get the numbers to balance, but are you sacrificing your children’s college fund, your retirement plan, your entertainment and recreational activity or tithing? If you’re currently doing well financially, wouldn’t you like to do better? A healthy budget recognizes that there are a lot of things we need, want and desire in life—all of which have a price tag attached to them. A healthy budget does not limit or restrict you to pursue the things you desire in life. It simply helps you to understand that money is finite. There’s only so much of it that will flow through our hands and we have to make the most of it.
I’ve compiled some budget percentage guidelines that will help guide you to ensure that as you spend money and obligate yourself to payments you have considered that there are other things you want to do in life that requires money. These budget percentage guidelines will ensure that you’re not over-spending or under-funding a particular category.
•Tithing/charitable giving—10-15 percent
•Clothing— 3-7 percent
•Child Care/school—5-10 percent
These are guidelines and are not the universal standard. They are flexible and can be manipulated to line up with your priorities. The important thing to understand as you slice your money pie is that a bigger slice in one category will require a smaller slice in another category. For example, you can cheat up on the housing category allocating 40 percent of your income as long as you reduce your transportation category down to 5 percent.
Here’s how it works. You want to total the amount of money you bring home in your paycheck each month. We’re only concerned with our take home pay (net income) since what we take home in our paycheck is the only thing we can spend. From there you want to look at what you’re currently spending on a particular category. To calculate the percentage of a specific budget category, all you have to do is divide the amount budgeted for that category by your net income. For example, let’s assume that your net income is $2,000 per month. Each and every month you bring home about $2,000. Let’s further assume that your house payment is $900 per month, your car payment is $450 per month and your debts (personal loans and credit cards) are $300 per month.
By dividing housing payment of $900 into your net income of $2,000 you calculate housing to equal 45 percent of your net income. By dividing car payment of $450 into your net income of $2,000, you calculate transportation to be 23 percent of your net income. By dividing your debt payment of $300 per month, you calculate debt to be 15 percent of your net income. By comparing these percentages to budget percentage guidelines, you see that you’re over-spending in each in every category. By adding up the percentages in these categories you’ll see that housing, car and debt accounts for 83 percent of your net income and you still have to buy food and pay utilities among other things. This leaves very little if any for tithing, savings, entertainment and other things you aspire to do with money.
Leave it to me to use an example that paints a grim picture. My example is a close depiction of what’s taking place in most households. They camouflage their reality by using credit to finance the rest of their lifestyle. Like money, credit is finite, at some point you’ll max out your credit an be forced to accept the wisdom in the budget percentage guidelines. I’d rather heed the advice now and begin to sculpt my budget to align with my priorities, values and goals and get the biggest bang for my buck.
(Mortgage and Personal Money Coach Damon Carr is the owner of ACE Financial. Damon can be reached at 412-856-1183.)