Budgeting - Breaking it down

Budgeting, oh the stress that suggests to me! :-) Budgeting is something that drives me crazy on a regular basis! Unless you were born into a family that doesn't have to be concerned with finances, EVERYONE needs to budget. I'm going to break down how I work our budget. I highly recommend young people, learn some form of budgeting BEFORE venturing out on their own...even just going to college. Once you get in over your head in debt, it's very difficult to pull yourself back out.

Having a job, gives you a paycheck. This paycheck pays you what your employer tells you your time is worth. Once your employer pays you your paycheck - known as your gross income, then Uncle Sam is going to take his share. This is known as taxes. Taxes and other deductions(i.e. Insurance), will be deducted from your check before you even get it. What is left over is your bring home pay - known as your net income. Your net income is what you will have to use for expenses, debt, groceries, etc. The average of all the tax deductions(federal, state, FICA, Social Security, and Medicare) for a single person or a married person paying the single rate(which is higher to avoid having to pay in at year end) is about 22%.

Paying taxes stinks! When you look at the amount going back to the government for your hard work...it's frustrating! However, you can't avoid it, so suck it up and let's move on! Once you learn what your net income will be, at least an average, you will have a little easier time planning for your extended budget. Keep in mind though, that things come up and can throw your budget into a tail spin, so stay on top of it!

So, using easier numbers to work with, let's say you make $10 per hour. You work at least 40 hours per week. Your gross income is $400. Now, the stinky part. Uncle Sam and other deductions are going to take 22% of that. That is $88 each week. That's going to leave you a net income of $312 that is truly yours. Of that $312, you have expenses to pay. But first, let's discuss the IDEAL way to budget. Ideally, of that $312, you are going to take another 20% out of that. That is another $64.40, dropping you down to $247.60. That 20% is the real key to keeping a solid financial foundation. Here is what that 20% is for: 10% goes automatically into a savings account. The other 10% is what you have to spend how you choose for the week. That means: $32.20 goes into savings, and $32.20 is your fun money. However, don't just let that fun money burn a hole in your pocket. Just because you have it, does not mean you have to spend it!

Ok, now to expenses. Most of us are aware how expensive everything has gotten! So, we are going to fake numbers to show how to budget on the income numbers above.

Listing your expenses. This list must include rent/mortgage, all utilities(listed out seperately), cell phone, vehicle insurance, groceries, etc. All expenses that must come out of your paycheck every month. It helps me to have a list of each expense, the date they are due, and the average the expense is to estimate a budget. Let's break this down just a little more:

Rent/Mortgage - Due 15th - $250
Electric - Due 8th - $100
Water - Due 10th - $35
Phone/internet/cable - Due 20th - $60
Cellular - Due 5th - $50
Vehicle Ins. - Due 28th - $75
Groceries - Bi-weekly - $150 total
Fuel - weekly - $35
Debt Reduction - Credit Cards, loans, etc. - $100
_______________________________________________________
Total Monthly Expenses : $960

Now, I am a stickler for comparing. I look at the net income after the 20% we pay ourselves and we have $990.40. When you subtract your monthly expenses from that net income, you are left with $30.40. Keep in mind that utilities tend to fluctuate on a regular basis. With this example, the budget works like a dream! That $30 per month left in your account is a cushion. Plus you have a savings if some emergency would come.

The next step I make in budgeting is breaking these expenses down into weekly payments. We have an average of $247.60 that we can spend on expenses, which means our rent/mortgage expense will have to be broke down into 2 payments(even if you just pay it all at once). So, here is how I would break this down, weekly:

Week 1 - Week 2- Week 3- Week 4-
Cellular - 50 Electric - 100 Rent - 125 Rent - 125
Water - 35 Phone/Int/Cable - 60 Groceries - 75 Vehicle Ins. - 75
Groceries - 75 Fuel - 35 Fuel - 35 Fuel - 35
Fuel - 35 Debt Reduction - 50
Debt Reduction - 50
_________________________________________________________________________________________________________________
Total - 245 Total - 245 Total - 235 Total - 235

Laying your expenses out on a weekly schedule, will allow you to see your what expenses have to be paid before the next pay period. This helps you avoid the extra fees of late changes or loss of service. Those late payment fees will eat you alive!



Next, I keep a running total of our total debt. This can get messy, especially if you have a large number of outstanding debts. This list includes: mortgage balance, vehicle loan balance, personal loan balance, credit card balance, student loan balance, and any other outstanding balances you currently hold. Once again, ideally, you never want more debt than you could pay off in 3-5 years at your current income. Any more than that, and you be paying an arm and leg in interest.

With the total running debt, I HIGHLY recommend learning how any loans you have work. Find out your interest rate, how much your current loan is going to cost you after paying your interest and principal, find out if your interest how your interest accrues(daily, monthly, quarterly, etc.), Know where your money is going! Find out if making several smaller payments each month are allowed, or if there are penalties for doing so.

It seems that so many get into financial troubles because they don't understand interest. Interest is basically paying the lending institution back for loaning you money, you didn't have. If you have an interest over 6%....you are going to pay at least double the money of whatever you took out the loan for. Say you buy a car for $10,000. Your interest is going to tack on at least another $10,000 before you are done paying for it, so make sure that car is worth $20,000 before buying it!

Another money sucker is the places that allow you to rent furniture, appliances, etc. I made this mistake many years ago. I was needing a washer, dryer, stove and refrigerator. I went to Rent-A-Center, and they were more than happy to rent me these appliances. Sure they offer weekly, bi-weekly, and monthly payments; but you are paying 2-3 times what you could go buy them for outright! Had I kept those appliances, The total of the 4 was around, $200 per month. With their 90 days same as cash, I could buy them for $2600. Great, to interest, right? WRONG! Sure you don't pay visible interest, but you are paying TRIPLE what you could go to someplace like Menards and buy them for. Those same appliances would have cost $1600 if I would have bought them with cash. Now, that being said, there was no way I had that kind of money laying around, so buying new wasn't an option. Do not be afraid to buy second hand or used appliance at a fraction of the cost, while you save for new ones! If you can't pay cash for something, you do not have the money to buy! It's that simple! Purchasing everything on credit has caused a rise in the bankruptcy cases to alarming levels. It's important to learn to live within your means, not barely surviving so you can make payments!

Having lived on 1 income for almost 15 years, I will tell you budgeting sucks! I have learned to juggle numbers, and go without A LOT! I have also learned how to be frugal, how to appreciate what I do have, and how to make the best when there isn't even money in the budget for groceries! I learned to be creative!

As I began my multi-part series on meal planning today, I decided to throw in the basics of budgeting too. You really have to learn both together to make it all work. Learning to compare prices, service, and companies; will save you money. Learning how to understand interest and interest rates will save you ton!

Something I have learned, by taking a look at your expenses, and debts; you can get a clear understanding of your financial state. If you are making a gross income of $20,800 year, which is a net income (minus your 20%) of $12,875.20. If you have expenses totally $11,520 year, and if your debt is more than 3-5 times that...you are in big trouble and better look at your spending habits! Using these numbers, you have roughly $32 each week that is yours to spend. This would be for eating out, going to a movie, buying new clothes, buying a coffee out, etc. If you are spending more than that, you need make sacrifices to live within your means.

As your total debts are figured, take a look at the balances, interest rates, and their standings. There are 2 ways to look at how to go about paying off those debts. The first, I was taught years ago. Pay off the lowest balances first. This allows you to see goals being met fairly quickly. The second, means looking at interest rates. This view says to pay off the balances with the highest interest first. Yes, this will save you a load of money in interest, but some of those balances will take years to pay down. So, you use your best judgement, as to which way will work for you. I have personally instituted a combination of the two ways. When we had credit cards, I always paid doubled the minimum balance. This brought those balances down rather quickly. On the higher balance accounts, I would make extra payments when ever possible. Even if it was just $50, it was an extra payment.

At 41, I am still learning what works and what doesn't. This blog is just a few tricks I have learned. Some of them, I am finally figuring out. It's also extremely important if you have a significant other, that you work together on the financial side of things too. Too many times, it's left to one person to handle the finances, and then you asking for trouble, as well. When there are 2 people involved in the expenses and debt, and only one is expected to handle everything....you have one person that doesn't have a clue! They could be out spending that money you were saving to pay a bill, and not realize it. If you have a partner, make sure you both are fully aware of all Finances! Save yourself some of the trouble I have dealt with!

Do you have other tips to share? Feel free!
Salli