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What Goes in the Budget
The first thing you need to know is your total income after taxes. Calculate the total from all sources, such as primary job, second job, child support and anything else you receive money from on a regular basis. If you consistently get overtime you can use that too. This will be the figure you have to work with.
If you are self-employed the first thing you need to budget for is income taxes. You may have federal, state and social security taxes that you need to set aside. If you don’t know what tax bracket you’re in and how much you should put away, you should check with an accountant. You don’t want to figure your taxes for the year and find out you haven’t put enough away.
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The next figure you want to set up is for emergencies. You should start a separate savings account and put 10% of all your income in it until it reaches three times your total monthly bills. This money should not be touched for anything but emergencies. This will save you from dipping into your next paycheck to replace a refrigerator or washing machine.
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The next 10% of your income should be put away for retirement. Another savings account should be set up and not touched. If you are very young, do not overlook this area. You may think you have plenty of time for this but just a small amount now can add up to a million dollars by the time you retire. If you are middle-aged you may want to make this a larger percentage, if you are already retired you may want to designate this money for something special you want, like a boat or something else fun.
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Rainy Day Money
Another 10% is designated just for you. If you want to vacation each year or save up for a new car, this is the area where you want to save for that. You can always add to it if you have anything left over at the end of the month. This is a good place to put a few dollars each week to save up for Christmas gifts. The point is to have money saved up to make purchases so you don't have to sramble or skip a bill payment when the time comes to buy. This also means you may have to wait a couple months to buy that new laptop or phone you've been eyeing.
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20% of your income should be put aside for investing. If your monthly bills can be paid by 50% of your income than this is a great time to invest. If you need more than 50% for your bills this is the area you would take it from. This fund can grow a little slower than the rest and once you’ve reached your goal of having three months worth of bills put aside, you can add that money to this fund.
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Bills & Daily Living Expenses
The last 50% is for bills. This would include your mortgage, utilities, car loans and insurance and groceries. You may have others like private school tuition or student loans.
Many families cannot pay all their monthly bills on 50%. That’s fine if you can’t do it right now. The idea is to start somewhere and work towards a goal. See if there are areas you can cut down or cut out. You may be able to decrease some of your expenses over time like paying off a car loan, or downsizing to a smaller apartment. The point to the budget is to figure out where your money is going and how you can make better use of it. It’s hard to stay on a budget, but well worth it in the long run. Just give it a try for one year and you will see how much better your financial situation will be.
- Image by jollyUK under CC BY 2.0