A Simple And Good Way To Start A Budget
A budget is your friend. It's there to tell you if you have enough money or not. The government has one. Your employer has one. You parents and friends probably have one. With the New Year and tax season approaching, now is a good time to start one yourself.
We understand that budgets are not fun. You've managed to not go broke without one. And starting one means you'll need to look at your bank account and your bills, which: Yeesh, boy is that a real drag.
But part of being an adult is realizing your limitations and flaws and learning to live with them. Money is part of that. Trust us when we say it's very satisfying going into the weekend and knowing, with zero doubt, how much money you can spend.
Thanks to the internet and smartphones and apps starting a budget has probably never been easier. And honestly, starting a budget doesn't mean you need to start counting every single penny that goes into or leaves your bank account (though you can if you want!). Once established, you can use it to just generally gauge your financial health
The Basics Of Budgeting
The first step to figuring out how much you can spend is figuring out how much you make. Since most bills are monthly, it's helpful to think in terms of monthly pay.
If you have a salaried position this is very easy. Look at your last two paystubs, add up what you made after taxes, and there ya go: That's how much money you make in a month.
Things get a little more tricky if you're an hourly employee. If your hours aren't regular, then it's worth averaging out the past few months, or even going off your leanest month, just to be safe.
Freelancing makes things even more opaque in that it's not always clear how much money you'll make in a given month, and how much you'll be paying in taxes. So, if you're on that 1099 life, average out the past few months of income, and then subtract 25 percent (a super-accurate ballpark figure gleaned from the Billfold's guide to freelancing taxes) to give you an idea of what you're making after-taxes.
Okay, good, cool. You have that number. Now we're going to apply the industry-standard 50-30-20 rule to it. NerdWallet has a comprehensive guide to this keystone of personal budgeting, but it's pretty straightforward.
Half, or 50 percent, of your monthly pay should be going towards "necessities" — that is rent, bills, food, and home stuff like toilet paper and soap. A fifth, or 20 percent, will go towards savings and paying down debts — essentially money that's going into your savings account or going towards a student loan. The final third, or 30 percent, is your fun money — money you can spend to go out, or buy a new bike or things that you definitely do not need but certainly want.
The Online Services That'll Pretty Much Do This For You
Now you could break out a spreadsheet and do this all yourself. But thankfully, we live in the age of the internet, so of course there are websites (and by extension, apps) that can do all of this for you.
Chief of which is Mint. Owned by the same folks that run TurboTax, Intuit, Mint will look at your bank accounts1 and your bill accounts, and provide you with a look at where all of your spending goes. For what it's worth, it's NerdWallet's top pick for budgeting tools.
Granted, it might take an hour or so to set up — you'll need to login to everything through Mint, and chances are you probably will not remember the passwords to everything. But once it's up and running it'll automatically come up with spending patterns which you can easily turn into budgets.
And you can get as obsessive as you want with it, setting up savings goals, or manually setting up the budgets yourself using the 50-30-20 rule. But mostly, the fact that you now have a service that's actively tracking your spending and when your bills are due, some might argue, might be enough. You see, we're kinda at an inflection point when it comes to opinion on personal budgeting.
An Argument For Not Really Obsessing Over Your Budget
There's a growing consensus that obsessing over every single dollar spent and earned is a waste of energy. Helaine Olen, a personal finance columnist for Slate and author of The Index Card, argues is that it's not that extra cup of coffee that will send you into poverty, but rather those unexpected expenses that, well, you always happen to never plan for that turn your finances upside down.
"There is, for example, next to no way to budget for the practice of balance billing," she writes. "That is, when you're charged by doctors for the difference between what they bill and what your insurance will pay."
In fact, just the mere act of making it easier to check on the status of your accounts and when bills are due seems to be enough to make people passively more frugal. Olen cites a study from two USC economists, Yaron Levi and Shlomo Benartzi, that found when people installed mobile financial tracking apps, their discretionary spending dropped 15.7 percent. That is, just being regularly reminded of their account balances and bill due dates made people spend less.
So if you feel like your spending is out of control, a possible half-step between setting hard spending limits is to just look at your bank account every day. Most major bank apps have the ability to send you a push of your current balance, and even when a purchase is made on your debit card. There's a solid chance it might get you to spend less, and as an added bonus, will make it easier to spot fraudulent charges.
While budgeting every aspect of your life might be falling out of vogue, there is still something to be said for setting aside money for a rainy day. We touched on this in our guide to saving for retirement, but a great way to go broke is to go into debt. Surprise destination wedding invites, medical bills, a busted phone or computer — all things that are very hard to plan for. That is, unless you're socking away money for when you need it. Which, really, as long as you're doing that everything else should fall into place.
FAQ
You mentioned taxes, I feel like I should do those first before diving into my budget, right?
That's not a bad idea, since you might want to factor in any sort of payment or refund you might be getting into your finances for the next few months. If you're unsure of how to go about filing your taxes, well, do we have the guide for you. But really, if all you have is a W-2 and maybe some simple write-offs like student loan interest paid (Form 1098-e) or IRA or 401(k) contributions (Form 8880), then it's a cakewalk. TurboTax is simple as heck and it costs nothing to file your state and federal taxes.
You didn't really touch on credit card debt. How do I factor that in?
Well, if you are carrying some credit card debt, you should be diverting any available cash to get that debt paid down. If we want refer back to the 50-30-20 rule again, the 20 percent of the cash you're saving should be going all towards that high-interest debt — possibly even dipping into that 30 percent discretionary pool to dig yourself out. Credit card debt is bad! And in almost all situations, you shouldn't be carrying a balance.
What about, like, big purchases?
You're asking, like, how to figure out if you can pull the trigger on a Nintendo Switch or maybe a new mattress? Well, if you're really into budgeting you could just reduce spending within your "fun money" to account for the larger purchase.
But if you're more into the "budgeting-by-feel" style, you could do what I call "Steve's Saving Method." That is, take a daily or weekly expense, say like lunch or coffee or a nice meal or booze, and cut it by a measurable amount or out entirely. Then do that for a given amount of time — while also not changing anything else about your spending habits — until you've equaled the value of that item.
So let's say I wanted to buy a $600 mattress, and I spend around $12 on lunch during the week. If I make an effort to spend only $6 on lunch, then after 100 weekdays I've saved enough money to account for the extra expense. Probably not the most precise method, nor the most expedient, but it's worked for me.
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