Being motivated to start a budget plan is tough. Some people think that a budget will restrict them from having a great life. That is because budgeting will tell you just how much you can afford to spend. This is a difficult truth to face when you are used to spending extravagantly.
The American economy is a strong advocate of spending. After all, the economy is 70% reliant on consumer spending. That is why our culture is known for our love to spend. We love big homes, luxury cars and a high rolling way of life.
But that has got to change and budgeting is the reasonable first step towards that change.
Creating a budget plan is simple enough but it will take a lot of self analysis – especially in the financial aspect of your life. It is oftentimes a painful process – especially when budgeting came to you late in your life. When you realize just how excessively you were spending, the truth will really hurt. And when you realize that you have to change your lifestyle to correct your bad spending habits, you will feel the pain all the more.
But like anything else, you will get used to it in time. Just keep in mind how budgeting can help you avoid a lot of financial mistakes – and even pull you out of an existing dilemma.
5 important categories in your budget
You will find a lot of suggestions on how your budget plan should look like. It can admittedly be quite confusing. You have to know that there is no one formula in creating a budget. You can apply a strategy like envelope budgeting and then make revisions here and there to ensure that it can be something that perfectly suits your financial situation.
Whatever form your budget will take, make sure that it will have these 5 categories.
- Housing. This is actually where a big percentage of our income goes to. This includes your mortgage or monthly rental payments, utilities, property taxes, home insurance, etc. Include your budget for home repairs, maintenance and improvements in this category too. You want to allot around 35% of your income on this. Assuming your income is $3,000, that means you only have $1,050 to spend on housing costs. If your expenses are beyond 35% of your income, that means you are living in a home that you cannot afford. You have to think about giving that up and moving to a smaller home. That is the only way that you can save. An article published on AmericaSaves.org reveal that Americans have relatively large home that we do not need. The article encourages readers not to pay for space they do not need. If you only have 2 kids, you do not need a spacious 5 bedroom home. Get a 3 bedroom apartment – not a mansion that is too big for you.
- Transportation. The next category in your budget is your transportation. This should only be 15% of your income or $450 if you earn $3,000 a month. The expenses under this category includes the cost to commute to work (fare or gas, toll and parking fees). It also includes your car loan payments, car repair and maintenance, insurance and other car related costs. If your expenses are beyond 15%, think about how you can lower that amount.
- Savings. The third category that should be included in your budget plan is your savings. There are so many reasons to start saving now that no excuse is valid in missing this category. In fact, you should shave this off the top of your income when you first get it. You want to put aside 10% of your income or $300 based on our assumed income. If you cannot meet this amount, you may want to work on your expenses to see where you can cut back to meet the 10% savings requirement. Include in this category your retirement savings.
- Debt payments. This is the category where most people are usually spending a lot of money on. This should ideally be 15% of your income. If it is beyond that, you need to cut back on a lot of expenses so you can make bigger payments towards your debts to bring it down. Once you have put your debts under control, you need to keep it within 15% of what you earn. If you do not have any debts, then this 15% will be your basis in making credit card purchases. If you earn $3,000 a month, make sure your credit card purchase limit each month is $450. That way, you are assured that you can pay off your balance in full each month – thus avoiding finance charges from bloating your credit card debt.
- Discretionary expenses. This category includes everything that is not mentioned here. It is 25% of your income – or $750. This includes food, groceries, clothing, and entertainment expenses. This is the part where you have the tendency to overspend if you are not careful. Decide which expense you can give up and which you cannot. An article from CNX.org revealed an effective way of choosing which expenses you will spend on – calculate the opportunity cost. For everything that you will spend on, think about what you are giving up on to make that expense. For instance, if you are earning $10 an hour, all your expenses can be based on that amount of time it will take you to work to afford that expense. For instance, buying a bag worth $100 means you have to work for that bag for 10 hours. Is that bag really worth 10 hours of your time? Using this way of thinking will help you prioritize expenses easily and meet the 25% limit on your discretionary expenses.
Tips to create a budget that you can follow
The dilemma for people who are implementing a budget plan for the first time is that they are having a hard time following it. When you are spending beyond your budget, you know that you need to change something.
Here are important characteristics of an effective budget.
- Simple. Make your budget plan simple. Do not over complicate things by putting in too much categories. Follow the 5 categories as mentioned above and you should be alright. It is okay to be detailed at first but once you have the categories in place, you can simplify it so your budget is not too tedious to maintain.
- Realistic. An important quality of a budget is being realistic. Some people make exaggerated entries in their budget that are sometimes not reasonable. According to an article from GetRichSlowly.org, one reason why your budget may not be working is because you are underestimating your expenses. Rank your priorities and know which expenses you should be making. Some people might think that a certain expense is unnecessary but if it is something that you think you need to be productive, then spend on it. Just make sure you give up something to avoid going beyond your budget.
- Specific. Your budget should also be specific. By specific, we do not mean that you have to be meticulously detailed. That can certainly help but it is not necessary. But you have to keep your budget from being vague. Identify the actual amount that you can spend on your home – and not base it on ranges (e.g. $300 to $400). This will be very difficult to monitor if you have vague amounts in your budget.
- Flexible. Lastly, your budget plan should be flexible. Do not think that the budget you started with will be applicable for the next ten years. You have to change it every now and then to make sure that it is still aligned with your ever changing priorities. For instance, your budget when you were single is different when you get married and start having kids. Consider the changes in your life and revise your budget accordingly.