I recently received this question from a friend:
What is your best advice for someone who is just starting to seriously budget??? I’m starting fresh, but I need some direction…
Well I started off really simple (and am still not an expert). Take a spreadsheet (or a piece of paper) and use two columns. In the first column, list all of your income for the month. In the second column, list every recurring expense; that is, the all the stuff you pay for every month. That includes:
- Student Loan payment(s)
- Car payment
- Car insurance
- Credit card payment (more than the minimum, if you can manage)
- Cell phone bill
- Gas costs (estimate high)
- Utilities (can be an estimate, but I’d use the most expensive month i.e. January)
- Gym membership
- Medication/Contacts/Doctors expenses
- Entertainment membership (Netflix, anyone?)
- Regular beauty expenses
Add up both columns and subtract all of the expenses from the income. The amount that’s left is what you have to spend (or save) per month!
Once you know how much you have after the calculations above, determine how much you have to live on, how much you should be saving, and start contributing to your 401K if you haven’t started yet. It’s really up to you how you choose to spend this money. Do you enjoy eating at restaurants? Then allocate a bit more towards that! I just try to make sure that I’m balancing my spending with what I’m putting into my savings.
A note about savings:
A rainy day fund (emergency fund) never hurt anyone! Note: A solid rainy day fund should be about 5 months worth of living expenses (Yes, it’s a lot. I’m still working on it). Once I complete my rainy day fund, I intend to open an additional savings account. This account will then function as my normal savings account that I put a certain percent of my income into. My plan is to not touch the rainy day fund. Ever. In the event that I lost my job or an extreme emergency happens, the rainy day fund will cover for me. I hope that day never comes.
But what about those random expenses that pop up? Like a $400 bridesmaids dress or car repairs.
That’s what your regular savings account is for. If you MUST dip into the rainy day fund (which is a better idea than reaching for your credit card), make sure that you aggressively repay it. The other alternative would be to put yourself on an intense budget for one or two months. That means NO meals at restaurants, consciously buying cheaper food, avoiding Target/Walmart, finding free hobbies, and reducing any additional expenses (clothing etc.) to $0.
Some cool tools:
I use FinanceWorks, a program offered through my bank (99 cents per month, totally worth it). It basically takes all of your spending and categorizes it for you and allows you to see where your money is going using colorful pie charts. For those of you whose banks do not offer FinanceWorks, Mint is a great option.
Check out these tools and report back. Let me know if they help you as much as they helped me!