December 6, 2018
A tiny fraction of the population loves budgeting and has years of spending data stored in Excel models. The rest of us would rather scrub grout between bathroom tiles. Using a budget is how to make financial progress on purpose. The trick is making it simple and intuitive.
This is my favorite method.
1) Figure out your monthly net income (the amount that hits your bank)
2) Target the amount you want left over each month and commit to that number (this is what goes to your future self)
3) Total up your monthly minimum debt payments
4) Total up your insurance payments (auto, life, etc)
5) Total up your monthly bills and put that into one number (stuff you pay for automatically without thinking about it like utilities, phone, data, gym, Netflix, etc)
[Other broad categories that you might break out separately: kids, pets, home services. Simpler is usually better.]
Now you are ready to find out what you can afford to spend on the last three categories: FOOD, SHOPPING, and FUN. These are the things you actually think about before purchasing. These are the only areas you need to focus on every month to stay on track.
$10,500 Net paychecks per month
[FOOD / SHOPPING / FUN]
$1,500 (15% savings)
Now calculate what is left for FOOD / SHOPPING / FUN. Brace yourself for the reveal. In this example we have $3,250. Decide how to allocate that money and track your spending using an online tool. Your budget will work if you stay close to these numbers. For example:
- $1,000 Groceries ($250 per week)
- $700 Quick bites
- $300 Nice dinners ($75/week)
- Home Depot
- Everything else
- $250/month to a savings account for annual vacation and travel
- $250/month for tickets, golf, whatever, guilt-free spending
Stay focused on the stuff you buy with the swipe of a card or the click of a shopping cart. This is where you find the answers to “We make a nice income, but why do we always feel broke?”. Some tips on how to stay close to your budget without collecting receipts in shoe boxes…
Food: figure out if you can be a once-per-week nice restaurant house or a three-per-week nice restaurant house. Accept this and you will know.
Shopping: instead of focusing on what you can and can’t buy, get in the habit of kicking your purchases into the next month. If it is mid-November, wait until December 1st. This will spread out your shopping and you won’t notice much of a difference.
Fun: shift money automatically each month to a savings account for vacations and big purchases. Don’t buy those things until the money is in your savings account. If you have to rob some other account or hope you make it up on the next paycheck, you are outside of your budget.
Use a budget or bad things are likely to happen. These people did not have income problems, they had budget problems. They all declared bankruptcy:
50 Cent in 2016
Mark Twain in 1984
MC Hammer in 1996
Burt Reynolds in 1996
Larry King in 1978
Mike Tyson 2003
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