What is a Budget?

Many people consider budgets as a negative part of your financial plan. Let’s take a second look! A budget is a marvelous tool for calculating the money flowing in and the redistribution of that money to live your life in the best way possible. A budget can help you with money choices today, decisions in 6 months and a plan for when you no longer work. Knowing where your money comes in and goes out will help you formulate a manageable budget that can accommodate several goals.

Best Practices

  1. Underestimate your earnings. (Be sure to jot down after tax dollars, not your salary)
  2. Overestimate annual expenses; because “things happen!”Of course, some parts of the country have a low cost of living, and other areas have a much higher cost of living. You will need to take into consideration as you formulate your budget.

First, determine how much you want to save. Pay yourself first. You may only save $25 a week, and that’s okay. If you set up an automatic draft, it is not as painful, because it goes straight to the savings account. Then when you get a raise, set up a second draft and route money to a long term savings account. This cash can be used to purchase property, save for retirement or other long term goals you have set.

Where Does My Money Go?

It is easy to find the average wage and cost of living by each state on the Internet. Since I live in California, let’s use those numbers.

According to the MIT Living Wage calculator, an adult with no children in California needs a living wage of $30,392 before taxes. This salary covers the essentials of housing, food, utilities, transportation, and taxes. There are no luxuries at this salary without some creative methods of saving/spending.

Housing will take the most significant bite out of your income. As a general rule, you want to spend no more than 30 percent of your monthly gross income on housing. If you’re a renter, that 30 percent includes utilities, and if you’re an owner, it includes other home-ownership costs like mortgage interest, property taxes, and maintenance.

Food costs also vary, but a good rule of thumb is to delegate 12% of your salary toward food. Again food prices by state and even by city: New York, Chicago, Los Angeles, and Seattle will be higher. You may want to utilize supermarkets that specialize in overstock or day-old bread. Another option is to cherry-pick Costco or Sam’s for some of their brand name, big bulk items like coffee, nuts, frozen vegetables, and even gasoline. Include groceries, eating out, and liquor when calculating the total food bills.

Adding a small child can add $220-$250 per month to that %. The USDA has prepared numerous food plans based on a thrifty budget to the most expensive of budgets. With careful planning, you might be able to spend as little as 9% on food costs. But, if you prefer to eat out regularly or purchase high-quality meats and organic produce, you could triple your bill. It is all centered on what is important to you. You may prefer to live in a tiny home and dine like a king. Or you may live in a large house and eat tuna fish every night. We all have different wants and needs. Your budget should be a reflection of what is most important to you.