Get Rich Slowly: Budgeting

Budgeting sucks. The stereotype that budgets are for the boring working stiffs who fill their days doing TPS reports is halfway true, but it's a discipline that we have lost and it shows (nearly 50% of families have less than $500 in savings).

Creating and sticking to a budget brings freedom, flexibility and prosperity. But the secret to budgeting is to make it as easy as possible. Lucky for you we've collected some of the best budgets, tips and tools to get you well on your way towards your financial goals this year.

Budgeting

The 50/30/20 Budget

Elizabeth Warren, the US Senator from Massachusetts and former Harvard Law School bankruptcy expert, designed the 50/30/20 budget for simplicity and versatility.

  1. Calculate your monthly net income
  2. Divide up your income into these categories:
    • 50% for Needs
    • 30% for Wants
    • 20% for Debt/Savings

50/30/20 Budget Graph

50% - Needs

Needs are things that have to be paid every month. The best way to calculate this is to look at your expenses for the past month and add up all of the things you must spend money on to survive. Some common things would probably include utilities, groceries, rent/mortgage, insurance, debts, transportation costs, taxes. You may find that you're exceeding your 50% already. Don't worry good thing we have another category to siphon from if that's the case.

30% - Wants

Everything you could live without but wouldn't want to. Going out with friends, online shopping, eating out at restaurants. If you're having a hard time meeting your Needs with 50% of your income, it may be time to start cutting some of your Wants and temporarily allocating that money into your Needs. No one ever said that this would be easy, but if you're spending the majority of your money going out with friends or online shopping, you're either 17 or you're doing it wrong.

20% - Debts & Savings

The original plan calls for 20% to go towards savings/investments. But if you're like me, you probably have a cloud of student loan debt still floating above your head. Before you start investing you should start to get your net worth back into the black as soon as possible. There are only a few exceptions to this rule. But prioritize creating an emergency fund ASAP (at least 3-6 months of what you need to survive) before you start to aggressively paying down your debts.

Example 50/30/20 budget

Gross $2500/month

Needs - $1250

  • Rent: $570
  • Groceries: $200
  • Taxes:$200
  • Utilities: $100
  • Transporation: $100
  • Insurance: $80

Wants - $750

  • Shopping: $350
  • Going out: $200
  • Restaurants: $200

Savings/Debts - $500

  • Emergency Fund: $300
  • Debts: $200

While in theory the 50/30/20 budget looks nice, it isn't for everyone. Some may feel like it is too constricting, that your minimum payments on student loans/debts far exceeds 20%. Or that it's too vague, that the 30% allocated for "Wants" is too broad and doesn't encourage financial discipline. A more structured example comes from USAA which suggests how funds should be allocated based on your income.

USAA Budget

  • 20% on Housing
  • 16% on Taxes
  • 12% on Food
  • 11% on 'Other Stuff'
  • 10% on Transportation
  • 10% on Retirement Investing
  • 7% on Insurance
  • 6% on Utilities
  • 4% on Entertainment
  • 4% on Short Term Savings

Example USAA Budget:

Gross $2500/month

  • Housing: $500
  • Taxes: $400
  • Food: $300
  • 'Other Stuff': $275
  • Retirement/Investing: $250
  • Insurance: $175
  • Utilities: $150
  • Entertainment: $100
  • Short Term Savings: $100

You might look at this and think that some of the categories don't apply to you. Maybe you rent and don't pay property taxes or your insurance premiums are much lower. Replace any of the extra categories with new categories, for example if you have student loan debt, I'd suggest also allocating the percentage dedicated to 'retirement investing' into the newly created 'debts' category.

Modify the USAA budget to fit your lifestyle and goals, here's an example.

Modified USAA Budget:

Gross $2500/month

  • Housing: $500
  • Taxes: $400
  • Debts: ($75 rolled over from insurance budget) + $250 (rolled over from Retirement/Investing) = $325
  • Food: $300
  • 'Other Stuff': $275
  • Retirement/Investing: $250 (rolled over into debts)
  • Utilities: $150
  • Insurance: $175 - ($75 rolled over into debts) = $100
  • Entertainment: $100
  • Short Term Savings: $100

Budgets with Tithing

Tithing is 10% of gross income, so you could include it into these calculations by subtracting the 10% and then calculating out your budgets. For example if you gross $2500 a month, after tithing you'd enter your new gross income as $2250. Here are two examples:

New 50/30/20 Budget

  • Needs: $1125
  • Wants: $675
  • Savings: $450

New USAA Budget

  • Housing: $450
  • Taxes: $360
  • Food: $270
  • 'Other Stuff': $247.50
  • Retirement/Investing: $225
  • Utilities: $157.50
  • Insurance: $135
  • Entertainment: $90
  • Short Term Savings: $90

Budgeting Tips

Automate everything

If you have a dependable and predictable income, you should automate your expenses. Setup automatic billpay, recurring deposits and automatic transfers. Your goal is to be able to see your money once all of the bills have been taken care of and know that you could do whatever you want (within reason) with it because you don't have any other financial obligations because they've already been taken care of. Some accounts may provide incentives for setting up automatic billpay.

Deposit your savings first

Always save first. Don't wait until after everything has been paid for to save. Put your savings away immediately. If you have a predictable payday, setup automatic savings on that day.

Have a plan for windfall money

You don't have to create a whole new budget for any unexpected income, but it's best to create a plan for any money you may receive as a windfall from side projects, settlements, or from an estate before they happen.

Create a buffer

Try to generate a buffer with your primary account. This is different from your emergency fund, which it's best to keep in a separate, but easily accessible account. It's prudent to never get close to a zero balance on your checking accounts. Not all expenses can be planned for, so having a buffer built into your primary spending account can provide another safety net.

Budgeting Tools

Mint.com

The best online budgeting software because of it's ability to aggregate all of your accounts. All of your assets and debts nicely wrapped up in a single tidy login. Personally I've found Mint's budgeting software to be fantastic except for two caveats; inaccurate categorization of transactions and accounts not updating as quickly as I'd like. Mint.com has a desktop application (for Mac OSX), as well as applications for Android and iOS. It's a free tool that you can use to better see how your money is being spent without a lot of work besides linking all of your online accounts.

YNAB

YouNeedABudget.com Application Screenshot

The best personal budgeting software out there. I recommending seeing if YNAB is a fit for you by trying out their 34 day free trial. Personally, setting up my accounts and budgets were a PITA, but once your accounts and transactions have been imported, you can start to take advantage of the software.

YNAB's killer feature is their rollover calculator. The principle of YNAB is to pay for this month's expenses with last month's income. Once you have all of your budgets set, import your transactions or just log them into the software as they incur (there's a mobile app to make things super easy). Once you've built up your first month's buffer you can start to focus on saving/investing, or start to budget for that vacation to Helsinki that you've always wanted to go on.

$60 for desktop application, but if you follow the link you'll get 10% off. The mobile app is free(iOS/Android). I suggest you try it out first to see if you like it before dropping down the cash.

NOTE: You'll need the desktop application to use the mobile app. There is a free version of the mobile application (works great, but lacks some features) but no free desktop version besides the free trial.

Manventist Budget Calculator

We've put together a budget calculator that generates a USAA and a 50-30-20 budget based on your monthly gross income here.


Financial competence is skill that anyone could have, but it requires discipline and planning in order to achieve to your financial goals. Whether you're just out of college making $50,000 a year with your first 'real' job or are still a student barely making $5000 a year, building the financial habits and discipline now will pay dividends.