The knitty, gritty details of how to start your budget
Up next, how are we going to do the thing? The knitty, gritty.
Whatever your goal, your starting point is this: I will save 20% of what I make this year. Think Monica Geller's dad telling her "20% of your paycheck where does it go?"..."the bank". Now that is you (except that you are actually going to do it).
You probably know the 50/30/20 rule. 50 needs, 30 wants, 20 financial goals (aka money in the bank / debt repayment). One aspect missing from this otherwise fab rule is what we spend on our big purchases. Right now, I only have two: I'm leasing a car and I'm renting an apartment. Both of these are getting plugged into needs, obviously. But it is seriously critical that we are smart about these big payments. Like, seriously. If you mess up this part, it will be hard to make your money work for you in the long run.
Your living expense (rent, mortgage) should be less than 30% of your net income. Woof. I low key hate this rule because I live for looking at Zillow and daydreaming about beautiful apartments, but we have to do it. As for the car payment, just think baby girl (literally what I said to myself when I looked at leasing a Mercedes). If your car payment is going to cost you dinner with the girls, then I have to ask, is it really worth it?
For our budget, we are going to figure out what we spend on needs. First off, needs are different to everyone (I actually put my groceries into my wants because I sometimes rack up a hefty bill on wine). Let's include everything that we need (duh) that isn't going to fluctuate a lot from month to month. I'm thinking rent, phone bill, utilities, car payment. This should be right around 50%. Like I said, mine is a little lower b/c I'm putting all my food expense into wants, so my wants is a little bit higher.
Wants. This is where we are going to spend most of our time. Play around with your list of wants until you can get the calculation to end up at average 20% into the savings each month. Also key here is that we want to average 20%. For me that means my February is relatively quiet so that my July is a party.
One tool we are going to use now is our handy dandy Google Sheets pre-populated Annual budget. When you make it through to the final page it will show you a breakdown of income v expense month by month and also that average savings number. That is the key number we are going to focus on to hit this 20% financial goals rule. Also, just to say 20% financial goals is inclusive of your debt repayment. Personally though, I choose to put my student loan into my needs and focus on saving 20% on top of this (this girl's gotta travel). If it's not realistic for you, then include it in your financial goals. Be honest with yourself with where you're at and proud of yourself for starting this journey!
Last but certainly not least, we are going to track this. We aren't going to track our needs and savings. We are going to track our basic wants. In other words, we are also not going to track the lump sum amounts (like a new lap top or a flight) because we already know we are going to spend this. Basically, now that we set ourselves up for success by staying within our means for our needs and calculating what we can spend on wants to hit our overall average 20% savings, we have to track what fluctuates -- wants. Just to drive this point home, I know that in July I have to spend $1000 on a flight. I include this when coming to my average monthly spending. This helps me figure out what I can spend in a month. But I'm not going to track 1/12th of this flight to spread it because that is simply unnecessary.
Here's what we do: create a note in your phone, laptop, journal with your wants broken down by month. I have 5 categories I am tracking:
Food (60% groceries, 40% restaurants)
Shopping (clothes + personal)
Hair / Beauty (excl. my quarterly hair appointment, but yes I factored this in during the budget phase because I know what I will spend)
Hans (my spoiled cat)
Sports (my yoga)
You should include whatever categories are really fluctuating the most. Honestly, I could probably sum this down to restaurants and shopping because that's really where I see fluctuation.
The point here is that we are not going to obsess and over-analyze our spending. We have peace of mind that our needs are already monitored and that this spending will allow us to reach our financial goals. Now its as simple as tracking a few numbers for a few categories. I'm not going to ask or even encourage you to track literally everything you spend - this is as unhealthy as tracking every calorie you consume.
We focus on the pretty - our dreams & the purchases that make us happy. We are smart about big purchases. We calculate how to get to our savings goals. We monitor our fluctuating wants.
Thanks for reading my philosophy on budgeting. Have an interesting thought that I didn't cover? Drop me a note, I'd love to hear more ideas!