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Hi friends! I finally have a budget post for you. Please note, I am NOT a financial planner. Everything in here is what I’ve learned from personal experience, reading a ton of information online, and a little bit that I retained from a personal finance class I took in college. None of the figures in here are my actual income, expenses, retirement figures, etc. Please do not use this as recommendations for your situation; I highly recommend working with a financial planner for your unique situation. I’m not going to go into definitions of the various types of accounts (401K, IRA, Roth IRA) – if you are unfamiliar with those, there are many resources online that can cover them more thoroughly than I will. So, let’s get started shall we?
The very first thing I do when I budget (and when reviewing and re-reviewing my budget) is look at my emergency fund and my retirement.
1. Emergency Fund: Most financial planners and finance websites will recommend that you should have enough cash set aside for 6 months of expenses. This money should be set aside in a liquid (meaning you can access it quickly) account and not touched. It gets used in true emergencies that you can’t pay for with your regular monthly cash flow, e.g. you lose your job and need to pay rent, make a car payment, pay the utilities; you have a major surgery and insurance doesn’t cover it; your dog has major surgery (I just had this happen); etc. A flash sale at J.Crew is NOT an emergency.
2. Retirement/Company Match: For retirement, I look at what match my company offers and do EVERYTHING I can to get the full match. Many companies will match your retirement savings up to a certain percentage; e.g. if you put aside 3% of your money into their 401K program, they’ll match that 3% with money from the company, so you really get 6% set aside. (You can, of course, put away more than what they match. 🙂 ) That 3% match is FREE money folks. Don’t walk away from it. If you have a company 401K match, GET IT.
If you don’t have your emergency fund fully funded, that’s OK. Just put money aside each month towards it, but for heavens sake, don’t lose the company match. Now, that being said, when my emergency fund isn’t where I want it to be, I cut back on other non-mandatory expenses (e.g. shopping, dining out) so I can divert money to building that up.
Next, once I have those taken care of, I look at what I’m currently spending.
Start with a simple list of all income minus mandatory bills/mandatory expenses. (These are all completely made-up numbers, not my real figures.)
Car Payment: $400
Then I start listing the monthly expenses I choose to incur.
Cell Phone: $150
Dining out: $100
(I could also argue that a car payment goes in this category but we’ll leave it as mandatory for the sake of this exercise. 🙂 )
Left over $600.
With this left over money, I start looking at my “play” money and savings goals. The first thing I would do with this leftover money is to – you guessed it – get my company match. If I’m already getting my company match, then I’d look at my emergency fund. Am I still building it up? Does it need a little extra padding? If so, I divert a chunk of this excess money to that. (If I didn’t have leftover money after the “choose to incur” expenses and I wasn’t getting the company match or didn’t have an emergency fund, I would take a SERIOUS look at those non-mandatory expenses.) If the emergency fund AND the company match are in a good place, I start looking at other goals/fun items.
Now, I’m a saver, but I also believe that there’s no point in working hard and earning money if you can’t enjoy it. When I have wiggle room in my budget, I allow a budget for shopping and extra dog walking for Maizey. I also set money aside each month for traveling – just a small amount – but over time it adds up so when I need to book a plane ticket, I’m not taking a huge hit out of my monthly cash flow or (heaven forbid) the emergency fund. These will be different from person to person but ther things you could divert that excess money to might include:
- Additional retirement accounts (e.g. Roth IRA – individual retirement account) – there are tax benefits (and obviously long-term, I-wanna-retire-in-this-lifetime benefits) to saving for retirement…so you want to make sure you are adequately saving for retirement before you blow all your excess money at J.Crew (are you noticing a pattern here. I have a J.Crew problem)
- Saving for a down payment on a house
- Saving for a new car
- Remodeling your kitchen
- Buying a Kate Spade purse
For my various “funds” I keep entirely separate savings accounts just so it’s easier to track. 1 for an emergency fund, 1 for a travel fund, etc. Most banks will allow multiple accounts but be sure to check with yours and what, if any, fees will apply for multiple accounts. [Email me at afoodiestaysfit @ gmail . com if you need recommendations for a savings institution if your bank doesn’t offer this.] .
SO. How do you know if you are spending “too much” in any one category or if your expenses are “normal”? LearnVest.com is an AWESOME resource for that. They recommend the 50/20/30 rule.
- 50% of your money should go to essentials: housing, transportation, utilities, groceries (these are TRUE essentials. don’t get these confused with lifestyle)
- 20% should go to financial priorities: debt, retirement, emergency fund
- 30% should to go “lifestyle” expenses: dining out, internet, cell phone, gym
You can read more about these percentages in their Ultimate Budget Guideline article but basically, you just divide what you’re spending/saving on those categories each month by what you make each month. If you sign up for an account with Learnvest.com, they calculate those percentages for you based on the expenses you categorize and make recommendations for where to increase or decrease your spending/savings.
OK, so now that we have that “Big Picture” stuff covered, let’s talk about how I manage my budget on a day-to-day basis and some tips.
- I use a personal finance management (PFM) tool: that’s just a fancy term for an online budget that aggregates all your accounts into one place so you can see your whole financial picture at once. I think the most important step in budgeting is to know where you spend your money, and I definitely know where every penny goes from my account! Some banks offer PFM tools in-house (not many) so if yours doesn’t, Mint or LearnVest are great tools for this. You log in (they are safe and secure), hook up your bank accounts/savings accounts/loans and it pulls in all the transactions. You can then set up a monthly budget and categorize expenses into the budget categories. To set up the accounts will take just a few minutes, but I recommend that you also take time when you first sign up to go back and categorize a month of expenses so you can get an initial picture of where you are spending your money. The more you use Mint or LearnVest, the more you’ll create a pattern of how you want to categorize and budget for certain items. For example, when I have a trip, I create a one-time budget for that trip and transfer money in from my travel fund to offset it.
- I look at my budget and spending daily. I spend 5-10 minutes each day reviewing transactions to make sure they are categorized correctly and reviewing my budget. This helps me stay on track and make sure I’m not overspending and/or not meeting my goals. If I see that I’m quickly burning through my grocery budget, it makes it easier to put back the kombucha.
- I review spending trends each month. I look back each month and see where I’m constantly going over budget. I look to see if the budget I’ve set is realistic or if I’m just not being disciplined. Usually, it’s the latter.
- Use cash. One way I’ve solved the problem of overspending is to take out cash for groceries and dining out – those are the two where I constantly overspend. It a psychological thing – i’m stingier with my spending when I have to watch the cash decrease in my wallet as opposed to my debit card easily swiping, even though I’m still looking at the transactions everyday. Try it. If you overspend on shopping, use cash for your J.Crew outings. If you overspend on vacation, take cash out before traveling. You get the idea.
- I use eBates for everything I can. If I’m shopping for gifts, shopping for work clothes, ordering make-up, if I’m buying anything online, I check eBates first. (Or, if I find something in the store, I might wait to buy it online if I know I can get free shipping so I can use eBates.) It’s a very easy way to earn cash back. I’ve even started ordering my toilet paper/shampoo/razors/etc. from Drugstore.com because I can earn cash back (and it keeps me out of trouble with Target impulse buys). If you sign up, please use my referral link. This is a post about managing finances after all, and mamma’s gotta buy Maizey treats. 😉
- I walk away. If there is ever anything I want that is over $30 that I didn’t plan for, I make myself leave the store before I can buy it. If I still want it after wandering around for 30 minutes, I start to think about it again. If it’s over $75 and I didn’t plan for it, I make myself wait an entire day. This helps prevent impulse buys.
I know this is a ton of information but I really hope it’s helpful. Again, I am NOT a financial planner but I do spend a lot of time budgeting and trying to find a balance between enjoying my income and saving for the future. I do recommend talking to a certified financial planner to get your retirement and other long-term goals reviewed and set up.
And, FYI, I definitely make money mistakes – um, oops, I really didn’t need that Kate Spade purse or, well, geez, these polka dot pants are only $30 and I know I’ve already spent my shopping budget, but come on, it’s a deal! or I deserve these Lululemon underwunders – I work hard! But I have to remember that I’m putting away a ton of money into my retirement funds and I budget for big purchases fairly well.
So, in summary, my top 3 tips:
- Look at your emergency fund and retirement plan.
- Know your financial goals (traveling, down payment, remodeling, a kiddo, Christian Louboutins, etc.) and plan for them, save for them.
- Know where your money goes! Don’t look at your budget and spending once and then never look again. Constantly look at your spending and evaluate where you can improve and how you can better allocate your money to reach your goals, whatever they are.