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Thursday, May 16, 2013

Budgeting 101 With Guest Blogger


Today I have teamed up with Angie Picardo from NerdWallet to discuss the most common issues people have when it comes to finances. Read her article below to get some very useful tips on how to make the most of your money and take control of your future and feel free to leave any comments and/or questions.



Budgeting 101


Let’s face it, Budgeting is not a glamorous task. It’s dull, dreary, and depressing, at least at the beginning. It’s nowhere near as fun as actually spending the money that you’re supposed to keep track of.  But, as you may have learned, budgeting is not nearly as bad as one day going to make one of those purchases and finding out that there’s nothing left but some cobwebs and a rather large negative balance on our credit card.


Let’s see if we can’t make this whole thing a little easier. I like to start with a fresh piece of paper and some colored pens to make things a little clearer. Once you’ve got your pens, paper, and a clear space, then we can get started!


If I Had A Million Dollars

The defining aspect of your budget will be your income. So total up all sources of income, which is usually your job’s paycheck and financial aid, depending on your status of a student. We’re going to block out this number somewhere prominent, as this number will guide us through the rest of our decisions. Take the time to download your last month’s bank statement or gather a few receipts – we’ll need to keep ourselves honest when budgeting.

Once you’ve written out your income, it’s time to do a little math. Calculate 30% of your income and write “Housing” next to it. This will be the goal for rent and utilities. Then take 20% of your income and label it “Fixed Costs.” This portion includes insurance, groceries, utilities, and other non-negotiable expenses. This leaves us with 50% of our income accounted for, so what are we going to do with the remaining half? Conveniently, the last portion will be broken into 30% and 20% as well, accounting for our personal purchases and savings, respectively.

Example:

Income
$2500
Rent
$750
Fixed Costs
$500
Wants
$750
Savings
$500

This might seem harsh, but it’s the start of a sustainable budget that will allow you short and long term financial stability. Let’s look at the individual categories to clear up any questions.

Lobster Every Day

Only 30% of my income towards rent? Impossible! And it may be at first, but budgeting is about working towards a goal that will allow you the things you want now while securing financial stability for later. Setting a rent limit of 30% of your income ensures that you won’t be left without a roof in case of a financial emergency. In the case that you absolutely aren’t in the position to make it less than 30%, the extra money has to come out of the wants category. The 20% of income made up by fixed costs includes things that are absolutely essential – groceries, insurance, the phone bill, etc. This does not include your gym membership, which comes out of wants, as well as things like cable TV and filet mignon.  All entertainment spending, all going out money, and similar costs are classified as wants.

The savings portion includes both retirement savings and debt payments. If you don’t have an emergency fund yet, that should be the first thing you set up. Three to six months should be ideal, which works out to about $10,000 in an emergency fund, only to be touched in case of loss of work or other extreme situations. Afterwards, your savings should go to a retirement account, such as a Roth IRA or 401(k). In extreme situations, however, such as large amounts of debt, consider focusing on eliminating that first.

Homework

At this point, you should have calculated the your budgetary categories and figured out your own priorities. The advantage of splitting up your budget outlined above is its flexibility. What may first seem like an overly strict budget is actually quite freeing – once you control your finances, as opposed to being controlled by them, you have the freedom to buy what you want, when you want, as long as you’ve budgeted for it.

The last step is to check yourself – see where your weaknesses are and prepare to watch out for them. This is where the receipts and credit card statements come into play. Add it all up and sort it into your categories. You may find that those $5 sandwiches eat up a huge portion of your food budget, or that an occasional trip to the mall is costing a lot more than you expected. By budgeting, you eliminate these unforeseen cases.

The corollary is, once you’ve used up your want budget for the month, you’re done. That’s it. Making a budget is only half the battle; the other half is sticking to it. Some months, you’ll do great, others may leave you with an unexpected expense or two. This is to be expected; don’t let a momentary lapse ruin the whole thing. But first, lay out that budget and stick to it for a few months. Once you’ve aced that portion, look out for Budgeting 102.

Angie Picardo is a writer at NerdWallet, a financial literacy website where, after you begin budgeting, you can find advice to answer the question, “am I saving enough?”