Making a Budget: Are You Above Average?
I don’t really know anyone who loves to budget – nor many who love to diet either. But unlike cutting calories, your budget isn’t about denying yourself. It’s more about taking control to choose how to spend the money you have.
Budgeting doesn’t sound like so much fun? Nope, it really isn’t. But it doesn’t have to be that painful. And, what a financial boost you might enjoy even by making a simple budget. So rather than call it budgeting, try a spending plan – and evidently more of us should be using one. According to survey data in the Federal Reserve’s report May, 2018:
- 4 in 10 adults say they don’t have enough to cover an unexpected $400 expense,
- 2 in 10 can’t pay their bills in full for the current month,
- 3 in 10 have family income that varies month to month.*
Having a spending plan could help with these cash crunches.
Can budgets curb spending?
Making a good budget doesn’t need to be complicated or take a lot of time. Use a pencil and paper, or if you like computer spreadsheets, start there. Here’s what you’re looking to do:
- See where your money goes (are these your priorities?)
- Determine if you can cut (when too much is going out)
- Find some to save and invest (for things you really want)
- Build an emergency stash (for the unexpected)
- Get out of debt faster (and save fees)
When you see where your money goes, it’s easier to see how to adjust your spending. You may even be able to reduce or cut out some expenses.
How do you make the best budget?
A budget is just an estimate of how you plan to use your income. You are earmarking incoming dollars to pay expenses you will incur. So basically your plan needs these two columns:
- Cash coming in = Total income you get from paychecks, bonuses, dividends, tips, alimony received, gifts, side hustles, etc.
- Cash going out = Total expenses you pay, plus debt repayment & some for savings
Opt to create a monthly – or even weekly – budget if money is tight (if your income fluctuates, you live paycheck to paycheck, lost your job, you’re a student). If you have a great handle on your finances and things don’t change much, an annual budget – 12 months – might work for you.
Budgeting often follows a spreadsheet format. Whether it looks very serious, with detailed expense categories and sub-categories and dollar amounts for each or not, you are basically adding and subtracting. You can find a simple budget format here.
But you can also opt to use percentages rather than estimate fixed amounts for each expense category.
Budgeting with percentages vs. dollars
Using percentages doesn’t mean you cut out some smaller expenses or don’t account for entire amounts. But rather than agonize over adjusting dollars and cents, percentage budgeting focuses on your income pie – or how much each expense category needs from your total income.
For example, here are expense categories for the average consumer, totaled by percentage:
- 33% = Housing (rent or mortgage, utilities)
- 16% = Transportation (including car loan)
- 12.8% = Food (groceries and restaurants)
- 11.2% = Insurance, 401k (portions you pay)
- 8% = Medical/Health care
- 3% = Clothing
- 5% = Entertainment/Recreation
- 10% = Miscellaneous (personal items, cell phone, education)
The pie chart below helps visualize what the average American spends for these common categories. It’s based on average total expenses of $60,060 and average income of $73,573 (data for 2017, before taxes), according to statistics released September 2018 from the U.S. Department of Labor:
If you will make student loan repayments, for example, adjust your percentages to allow for 7-10% for a new category. But for payments on a credit card, only the interest and fees would go in this repayment category (you would include each credit card purchase, like new shoes, in the appropriate expense category).
If you want to use an app rather than pencil and paper, you might check Mint or GoodBudget.
To draft your own spending plan, start with the Money Godmother’s free budget printable here.
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