You need a budget. Period. A budget ensures that your money goes to things that are important to you. A budget also ensures that you maintain a positive cash flow- meaning you don’t spend more than you earn. Budgeting basically divides your money between needs, wants and goals. Or I should say needs, goals and wants, since that should be the priority order.
If you don’t use a budget, even regular occurring bills and expenses will catch you off guard. Not using a budget is a great way to land yourself in debt or to dig yourself deeper in debt. Not using a budget is a great way to end up with late fees and overdraft fees. Basically, not using a budget is a great way to make money not work for you.
But budgeting sounds so hard and time-consuming and intimidating. Assigning a job to every dollar just sounds tedious! And maintaining an envelope for every category just doesn’t sound practical. Fair enough. For some people, budgeting every dollar they earn is no big deal. Some people even come to enjoy the organization that micromanaging money brings to their finances. But maybe you’re not one of those people. You know that you’ll never be able to get in the habit of sitting down to monthly budgeting sessions. But… you still need a budget.
If you are one of these people who just despises the thought of budgeting, rely on automation and simplicity. You still need to sit down and come up with a budget, but we’ll keep it simple. Then use all the tools available to automate your finances and make that budget fool-proof. The goal is to get your budget in place and not have to look at it again.
Before we go any further, one big warning! If you hate budgeting, don’t plunge into home ownership. Home ownership does require extra budgeting. When you own a home, you may need to budget for insurance and taxes if they aren’t bundled with your mortgage payment. You also need to budget for home repairs and maintenance- which is one of the hardest expenses to budget for. Home ownership comes with lots of additional costs, and while it does end up being an investment that pays off, investing your money elsewhere can bring similar or better yields.
If you already have bought a home, or decide that home ownership is still for you, great! Just don’t think that you have to buy a home to be financially successful. If owning a home is going to make your life more stressful and derail your budgeting, don’t do it! And with this in mind, I’m going to assume for the sake of this post that as a bare-bones budgeter, you have no intention of ever owning a home.
On a piece of paper or on this spreadsheet, list and total all your regular expenses. For this exercise, this includes all your bills, regardless of whether they are for a ‘need’ or ‘want’. Building this list is a good time to review what bills you really want to be paying. You may decide to cancel some of your bills. You may realize how much of a drag certain bills are on your finances, or that they simply don’t fit in your budget, or that you don’t actually use certain services.
Things like rent and your cable bill will be easy to list since they don’t fluctuate from month to month. If you pay your car insurance monthly, this will be easy as well. If you pay it annually or semi-annually, break it down to the monthly level.
Utilities are going to be the toughest one, since they change so much from month to month. If your utility company offers budget billing, this may be a good option for you. Basically, they look at your past usage and bill you fixed monthly bill based on that. Typically after a year, they re-balance your account and either charge you or refund you for the difference between anticipated usage and actual usage. Of course, the problem with this is that you may potentially be hit with a hefty year end bill to make up for high usage on your part. Depending on the utility provider, sometimes this charge can be spread out over the next 12 months.
If budget billing is not an option or if you’d rather do your own budget billing, find the average of your last 12 months worth of utility bills, either from your credit card or bank statements or directly from your utility companies. Don’t forget to do this for all your utility providers. Because utility bills fluctuate so much, don’t be afraid to budget above your average.
This may sound odd, but I recommend taking the total of your regular expenses and adding an extra 10% (multiply by 1.1). This will help you build a bit of a buffer and will protect against inflation. Basically, this will ensure that you won’t have to revisit your budget nearly as often.
Groceries fall in their own category since they are an essential expense, but can also be inflated by shopping whims and impulse buying. We don’t want to include them with the above expenses lest a wild shopping trip leaves you short on cash to pay for utilities and rent. $250 per person per month should more than cover the essentials in the Midwest, and slightly higher in bigger cities. For a real a bare-bones budget, include this with fun/misc below. If you get paid monthly, some self-discipline will be required to ensure that you still have food to eat at the end of the month! Or just stock up on pasta noodles and cheap pasta sauce and have meatless spaghetti for a week straight at the end of the month.
If living only for the moment sounds fun now, it won’t in 10 years when you’re just as penniless as you are today. If you’re already a saver, congrats! Setting financial goals and saving for them is key to staying out of debt and building your future.
Your biggest savings goal will likely be your retirement savings. If your employer offers a 401(k), using this is the best way to keep your budgeting and financial life easy. Try to contribute at least 10% of your paycheck. If your employer doesn’t offer a 401(k), include this on the list that we’re building.
An emergency fund is absolutely non-negotiable. Since we’re making a bare-bones budget, your emergency fund will double as your car-maintenance fund, so you’re going to want to aim for a little larger of an emergency fund than usual. $300/month is a good starting point if you have one car. If your health plan doesn’t come with an HSA, your emergency fund will also cover any health bills.
Unless you plan to always buy your cars with debt, you should also maintain a car savings fund. You should probably at least $50-100/month in this fund, although more will obviously buy you a nicer car faster.
Subtract your regular expense total and your goals from your income and you’ll be left with your fun/misc fund. This covers certain essentials such as clothes and gas. This will also cover groceries if you decided to go that route. If you ever plan on going on vacation, that will also come out of this fund. This requires some self management, but this is what comes with a bare-bones budget.
Putting your Plan in Place
Putting your plan in place requires an account for each major category (you only need one account for your all your regular expenses, instead of separate ones for utilities, cell phones, etc). To avoid confusion, open a savings and a checking account at both a regular local bank and at an online bank such as Ally. Remember to pick banks that offer fee-free accounts! Once your 4 accounts are open, link up the accounts so that you’re able to transfer money between the banks.
If you need to set up your own retirement plan, this will be a fifth account. I personally recommend an IRA with Vanguard and their target date funds. Doing this is straightforward, easy and low cost.
Your online checking account will be your bills/regular expense account. Ally gives you unlimited free checks, and you likely won’t need cash from the account to pay any of your regular bills.
Your online savings account will be your emergency fund. Whenever you need to use money from your emergency account, you’ll need to log into your account and move it over to your bills account, and then write a check. This is partly to keep you from using your emergency account for non-emergencies. Hopefully the process will give you time to consider whether the expense is really an emergency or whether it should come from fun/misc.
Your local checking account will be your fun/misc account. If it helps you manage your money, you can withdraw in cash the appropriate amount for each week.
Your local savings account will be your car savings account. This is important in the event that you are buying a car from a private seller and need cold hard cash. It will be easier to withdraw $6000 in cash from a physical bank location than from your online bank.
Automatic and Foolproof
Most employers now offer direct deposit. Have your employer directly deposit your paycheck into your local checking account. Schedule automatic transfers from your local checking account to your other three accounts to occur right after your paycheck will be deposited. If you get paid other than monthly, you’ll need to break down the amounts appropriately. If you use my spreadsheet, the sheet will break the amounts down for you.
To further automate the process, set your bills to autopay through your cell provider/utility provider, etc. If you score a discount this way, even better! If you want, you could wait a few months to do this to ensure that all the transfers are going through and everything is automated properly.
Your budget should now be automated and ready to go! Monitor it for a few months to make sure all accounts are getting funded properly. Once you know it’s working, you’ll only need to revisit it if your bills go up significantly or if you go through a major life change. Good luck!
While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.