Let’s Create a Budget

Now, I know what you’re thinking… “This is gonna suck! I’m not gonna be able to go out to eat, get my nails done or go to the Lauren Daigle concert! Breathe. You can do this.

Investopedia says a budget is an estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis. Yikes! That’s a mouthful. How about this? A budget is a guide on how to allocate your income. It’s a guide. You can even think of it like a set of training wheels for your money. Maybe you like to be on a budget and will stay on a budget. There is nothing wrong with that. My guess is that for most of you, though, this will simply be a training period. I suspect you will become comfortable with your new goals — shopping sales, clipping coupons, and saving for items rather than pulling out a credit card will become the norm.

You can’t create a budget if you don’t know what you’re working with. So, if you haven’t completed your Income Analysis, click here to download the Income Analysis Worksheet. When you prepare your Income Analysis, be sure to use net income; the money you bring home after taxes. If you are a W-2 employee, that’s easy to see. You are working from the amount of your check. If, however, you are a subcontractor who receives a 1099 at the end of the year and you are responsible for paying your own taxes, including Social Security and Medicare, be sure these adjustments have already been made to your monthly income before we build your budget.

Your budget will be comprised of 10 categories. Everything you spend money on must fit into one of these 10 categories. Let’s begin with our largest category which is Housing and should make up no more than 38% of your net spendable income. Expenses in this category include rent/mortgage, utilities, maintenance and property taxes. We have a separate category for Insurance so if your insurance is escrowed into your mortgage payment, reduce your payment by the amount of your insurance premium for this exercise.

Next, we move to Food. We have allocated 12% to this category and it includes both groceries and dine-in/carry-out purchases. If you frequent the vending machines at work, include those expenses here as well.

Our second largest category is Auto and has an allocation of 15%. You need to include loan payments as well as lease payments, your fuel, maintenance and any personal property taxes your city/county may assess. Now, for those of you who own a vehicle, this is an opportunity for you to do one of two things; first you can increase your savings budget so you will have money to put toward another car in the future or if you are overspending in another category, you can allocate some of your auto budget to that category to bring your budget into balance. Finally, if you live in a big city and opt for a taxi or uber, you must include that transportation cost in your Auto budget.

Did you notice? We have already used 65% of our budget. That may be a little scary for some of you but let’s keep moving. Next, we look at Debt. Only 5% of your net spendable income should be used for debt. This category is usually the one that needs the most work as many of you live outside your means. All credit cards, personal loans, student loans and payday loans are included in this 5%. Some of you will stop reading at this point but I challenge you to press through this exercise. Not only have I provided other resources to help you tighten your belt, but you may also discover that you have an excess in another category that can be moved to the Debt section until you get some things paid off.

Insurance also comes in at only 5% and includes auto, homeowners, renters, and life insurance as well as accidental death policies. Do not include any medical expenses that you may have in this category. We will address those separately.

We have allocated another 5% to Recreation and Entertainment. Some reading this gasped as they travel often while others said big deal because they never take a vacation. Guys this is more than just travel. Any type of entertainment such as movies, date nights, golf, and gaming subscriptions are included here. This may be another category where you will need to tighten your belt but keep working through the process.

This next category is another one that you will either freak out or you won’t even bat an eye. Another 5% is allocated for Clothing. This includes both the purchase and any clothing services such as dry cleaning or ironing. Ladies don’t forget those boxes you get in the mail every month from your clothing subscription.

Another 5% is allocated to Medical/Dental/Vision. Include all prescriptions, office visit co-pays, glasses/contacts, AFLAC policies, cancer policies, and any portion of your health insurance that your employer does not cover.

5% is also allocated to Savings. This includes your rainy-day/emergency fund, college savings accounts for your kids, 401(k) contributions as well as any personal retirement accounts. I hope some of them said, “That’s not enough!” I agree wholeheartedly but you must start somewhere. My hope is that as you continue to work through your expenses you will reevaluate your priorities, make the necessary adjustments, and beef up this savings category ASAP.

Last but not least, is everything else and we only have 5% left to work with. All of your toiletries, makeup, haircuts, hair color, acrylic nails, manicures, pedicures, massages, and all cleaning supplies. Guys, don’t forget your monthly shaving subscription.

These are guidelines — a place to start. Everyone’s budget will look different. Once you know where you’re at you can prioritize what you need to work on first.  Check out “Tightening Your Belt” next to discover some tips and tricks to help make some of the tough decisions a little easier.

Download the Budget Exercise

Download Budget Guidelines