Like most of you, I had 2 parents who didn’t plan well and never taught me about financial responsibility, credit or even how to balance a checkbook. Most of what I have learned has come through hard knocks and a lot of mistakes. I have heard a lot of people give a lot of advice that I never took because it just didn’t seem like it was for me. Over the last several years I have really focused on making mindful decisions in my life and to try and create a life beyond my wildest dreams. That’s the key to budgeting properly, you have to find the thing that is really important to you and figure out a way to achieve them. This article is going to go into detail about how I decided to start paying attention to my finances rather than just the balance of my checking account, how I put a plan in place and some tips and tricks I have picked up along the way.
A few years back my wife and I started to talk about whether or not we wanted to have a child. Our talks lasted for nearly 6 months and during that time we discussed topics like how we wanted to raise our child, where we wanted to raise our child, what would our future look like and our financial security. We are both rather progressive and smart people, but we were both carrying debt and at the time not completely sure what our future held for us. We did know that we wanted a child and we also knew that it was important that my wife stay home with our new born for at least the first year (now it’s as long as possible). Our bills were pretty fixed, we didn’t know the true financial impact a child would bring and we knew we didn’t want to rely on 2 incomes as this would mean having a child just to have someone else raise. (Now I should mention, everyone has a different path and a different journey, so these are not judgements coming across the page, this is just my experience and our decision making process.) I don’t make a ton of money, certainly not more than a double income, but I did believe it was possible to raise a child on single income. I started really taking a look at every dollar that was being spent, why it was being spent and if it was a necessary expenditure. Rest assured this was a painful time in my wife’s life as I am sure I drove her bananas.
What I came up with were some cuts in our budget that could be made easily and have little to no impact on our comfort of living. I will get into this in greater detail as we get in to the budget itself.
Where to start
Always start at the beginning, how much money is coming in. You can’t build a proper budget without knowing how much you are bringing in every month. Plan for the future, if you have 401k or other retirement funds available, set money aside. Some companies even have a program where they will match what you contribute. Take advantage of this, I put away pre-tax dollars into our 401k and my company matches the first 5%. That may not sound like much but think of it this way, if you make $50,000/year that is $4166/month, a 5% contribution match is $208/month or $2500/year. If you are on the job 4 years you just made an extra $10,000 dollars pre-tax for nothing. Have multiple checking and savings accounts at least 3 of each, but I recommend 4. Work with your partner to build the budget together, take it from me the biggest mistake is to do all this work not incorporate your partner and fight over money. Give yourself some wiggle room and don’t be so strict as to budget out any fun or date nights.
Taking The First Steps
So you set up your 3 or 4 accounts, interlink transfers between these accounts. This is key. See what I have learned is out of sight out of mind, one of the easiest ways to adhere to your budget is to separate funds between banks into different categories. We talked about what was important to us and what we wanted to spend our money on. The first one was our new daughter, she has her own checking and savings account where I have scheduled transfers reoccurring every pay day directly into her account. That money doesn’t affect me at all because I don’t even get a chance to miss it. Travel was another area very important to us, we use another bank where we have a checking and savings account where funds that we have budgeted in are directly deposited every pay day. We have our main account where we pay all of our bills from and then my wife and I both have our own checking and savings accounts were we have allowances put aside for our personal spending. That money we do what we want with. If there is something I really want I save for it until I have enough in my personal account to afford it. This way I have guilt free purchases and the peace of mind know that the household is running smoothly. Now in our main account we have a savings set up where we have an automatic deposit scheduled every payday. There used to be these old infomercials on t.v. for a rotisserie chicken machine, the hook was “Set It and Forget It”. This is the best advice I can give when figuring out your budget.
First things first, take your bank statements from the previous 2 months, gather up all your bills and figure out exactly what you are spending. There is so much wasted money being spent mindlessly that when we know exactly what the figure is you be shocked. Let’s say you eat out for lunch everyday, modestly lunch would average $7, on average we work 22 days per month, that is $154 dollars a month. Let’s also say you had an unpaid credit card debt of $2500, if you reassigned this money it would take you a little over 16 months to pay it off. Less debt less stress.
Go through your bills, often times are bills come in, we send a check or make a payment online and we go on our way. Take a look at what you are spending your money on. A good example of this was our cable bill. Nowadays everyone wants to bundle everything, not that all bundles are bad but it doesn’t mean they are great either. Our cable bill included internet and on average we were spending $157 after taxes and fees. I asked my wife what shows she watched and what the baby watched, come to find out that we typically watched the same 7 or 8 channels. 200 plus channels were never turned to? Why are we paying for channels we aren’t watching. I researched my cable providers packages and found that I could have a smaller package and still have all the channels we watched. The only trouble was the internet, the bandwidth that came with that package was considerably smaller. I called them up discussed what I was looking for, made some changes and now after tax we spend $42. We now have $115 to reassign. Do this with all of your bills.
Groceries is another huge saver, now I am not a coupon caper. I don’t understand the complex trigonometry that goes into these crazy coupon savers. I am also somewhat of a picky eater, I know part of their system is to only buy what is on sale. This isn’t how I grocery shop. What I did notice was how much food gets thrown away, either by over cooking, over portioning, spoiled or expired. In my eyes this is the same as throwing cold hard cash right in the garbage. I started paying attention to what we ate, how much we ate and how long items would last. Some veggies I switch from fresh to frozen, I started cutting our portion sizes down to those recommended for healthy living and stopped buying overstock. The great thing here is that not only are you cutting your costs buy shopping this way but you are forcing yourself to buy fresh and eat fresh. We have a set weekly figure that we adhere to, this allows us to budget for other things and keeps us from being wasteful.
So you have your Net Income which is whatever your take home pay is after taxes, 401k, Insurance etc. Then you have your Net Net Income which is what you have over after everything is paid for the month. This is an important figure and the more you can get this figure to grow the more you can save and plan for your future. This is the number that is necessary for your automatic transfers to savings and other funds. Now I can’t tell what and how much to put where. I will say that you can do a lot more than you think you can with just a little bit of planning.
Enjoy the freedom the budget will provide. Plan the trip you have always wanted to take. It may take you 5 years saving $100 a month but you won’t have the excuses anymore about why you haven’t gone. Save for your children and grandchildren. $10 every 2 weeks for 18 years is $4320 before interest. What a great graduation gift. From the wise words of the Ronco Rotisserie guy “Set it and forget it”.