Budgets – Good in Theory or Practice

When I speak to people about budgeting, I usually get a blank stare or a response such as, “I’ve tried budgeting before but budgets don’t really work.”  Well, it is true that budgets often do not work for people. But, the issue is more that people have really never been taught how to create or use a budget rather than that budgets do not work. And, this is not surprising as most people have never had to take a class or been taught by anyone how to create and/or use a budget?

A budget in its simplest form is a set of goals for how you are going to spend your money based on how much you make and what your big picture goals are (goals such as saving for a new car, house or retirement, etc.). Many times, when people try to create a budget for themselves, they don’t really know how much they truly make and spend and, therefore, set unrealistic spending goals. This can be very discouraging and frustrating trying to follow an unrealistic budget so they ditch the whole budget process fairly quickly.

There are basic principles to budgeting but there is no one-size-fits-all budget that will work for everyone. Once the basic principals are learned, they must be applied to one’s own situation. What are those basic principles? 40% basic living expenses, 25% debt payoff, 20% discretionary, and 15% savings. These percentages should be calculated from your “net paycheck,” the amount that you actually get from your paycheck after taxes and other deductions, like medical premiums, are taken out.

Besides setting realistic goals for yourself when creating a budget, keep in mind that most people’s spending habits are not going to change overnight. So, start with manageable goals and take baby steps towards your ultimate goals. This is especially true for those who have been working for at least a few years and have grown accustomed to certain spending habits. Have you ever heard the sayings it’s hard to teach a dog new tricks….? Well, the longer that you have been working, the more set in your spending habits you are and, most likely, the harder it is to change your ways.

For example, if you have not been savings anything, setting a budget for yourself of 15% might be too drastic of a change. So, sometimes it helps to start with 5% or 6% and see how you do with that budget. Once you start saving money and you see your savings accumulate, many times this creates confidence and motivation and encourages you to save even more.

How to start? First, look at what your real spending is. Look at your pay stubs and see what your “net paycheck” is. Then, figure out how much you are paid a month, depending on how often your are paid (i.e., twice a month, every other week). Next, think about all your monthly basic living expenses (rent, utilities, food, gas). Do you know how much you spend on those necessarily basic living items? This should be about 40% of your net check. What about debt payments (student loan payments, car payments, credit card payments). This should be about 25% of your net check. If it is more than 25%. What is leftover should be for savings (15%) and for discretionary items, items that you do not need to live (restaurant meals, additional clothing, vacations, etc.).

Getting a handle on what your are really spending is a big first step, even if it is a bit discouraging.  If your basic living expenses and your debt expenses add up to more than 65% of your net paycheck, but your discretionary expenses are minimal, this is okay as long as your savings amount is close to the 15%. If it is not, then there may be some difficult decisions that need to be made eventually, such as cutting down on debt by trading in for a less expensive car or living with less for discretionary expenses, maybe 10% instead of 20%.

Remember that baby steps are advisable. So, start slow by looking at all your discretionary expenses and finding maybe one or two to cut down on or eliminate. And, little steps, while not seeming like much, can lead to a great outcome when done consistently. For example, if you get your nails done every other week for $30, cutting down to just once a month will save you $360 a year ($30/month for 12 months). Or, how often do you go to one of those big-box stores like Target or Walmart and pick up a magazine or lipstick or drink and think that the $5 or $6 dollars doesn’t mean anything. Once a week? Cutting this habit out can save you $312 a year ($6/week for 52 weeks). People often think that little changes will not do them any good. But, making no changes will also not do any good so it is worth a try.

If you would like a budget worksheet to get started, please e-mail us at info@financialmakeoverforwomen and we would be happy to provide one to get you started.

Happy Budgeting!