Responsible and Generous Living in Early Adulthood

But a poor widow came and put in two very small copper coins, worth only a few cents. – Mark 12:42

How to Form a Budget

1. Where we began; it doesn’t start with numbers

When Krista and I began forming our budget, we heard from a litany of voices offering us advice. Financial experts like Dave Ramsey (who has the unpleasant tendency of calling people stupid) and Suze Orman, family members -including conspiracy theorist prone siblings- and our peers.

We quickly began to notice many of these people began their budgeting conversation in terms of dollars and cents. “How much income do you have and what are your expenses? You should spend X% on housing, X% on savings… ”

While these are important questions you will have to answer as you formulate your budget, it isn’t where this conversation should begin. The first questions Krista and I asked ourselves were; What are our most important short term and long term financial goals and what does our budget actually indicate about our priorities?

These will of course be different for each individual or couple but here is what we came up with as our financial goals and priorities.

Short term:

  1. Walk the line between frugality and generosity, living simply AND always giving at least 10% of our income to causes, organizations, and individuals we want to support. Never use our income as an excuse not to be generous.
  2. Pay off all of our debt as soon as possible. As I write this post our balance is just over $25,000 and steadily declining we are on track to be debt free by September 2014.
  3. Purchase a home with a 20% down payment and a 15 year mortgage by the time I reach my 30th birthday, I’m 26 as I write this post. In a future post we will explain why we strongly recommend a healthy down payment and a 15 year mortgage for purchasing a home as well as accounts you can use to save for these types of short term goals.
  4. Adopt two kids from a high need area of our world such as Ethiopia or Uganda, paying entirely out of pocket for all adoption related expenses before Krista turns 30. Again, in a future post we will share about this goal.

Long term:

  1. Make our money go to work for us. Allowing us to retire if we wish by age 65.
  2. Establish our retirement portfolio in such a way that our money will outlive us, allowing our generosity and giving to continue long after we have gone home to be with Jesus.

ACTION: Answer these questions: What are you hoping that developing your budget will give you the freedom to do? What do you hope your spending will reflect about your values?

2. Take an honest look at your spending

The next step Krista and I had to take was an honest look at our spending.

Soon after we were married, for a period of two months, we tracked every dollar we spent and where it went. Our first attempt was really simple, it was more or less a random list in a spiral notebook of every dollar that came in and went out.

Our initial findings were pretty alarming.

We learned that what we said was important to us, tithing, giving, preparing to live generously wasn’t reflected in our actual spending. We were spending more each month on going to the movies than we were giving to charity or saving for retirement, yikes! So many people are nervous about taking an honest look at their spending that they avoid it – a general idea of how much is in a bank account is not an adequate understanding of a budget, even if the balance is positive. We have talked to countless people our age who don’t have any idea of how much they typically spend in a month.

This is a crucial error, in order to establish a budget you have to know how much you are spending each month.

It wasn’t until we took the time to record every dollar that we had an accurate view of what our budget could be. It was disheartening to see how frivolous we could be. However we also discovered that if we made some simple changes in our lifestyle we could put much more toward our long term and short term financial goals. We had to make some sacrifices

ACTION: Pull out the spiral notebook and write down every expense. Figure out the totals for different categories of expenses ie. bills, entertainment, food, rent, insurance etc.

3. Tools to get started

There are several options you have for tracking your spending, here are a few that we recommend:

Mint.com is an excellent online resource that allows you to track and monitor every transaction, whether it’s from a traditional bank account, credit card, student loan, or investment. Mint will securely track and categorize transactions and we assure you it is very secure, see this explanation of how mint protects your information. Note that it will require log in information for each online account.

Mint also allows you to establish goals and track your progress. This tool helps motivate us and provides tangible signs of progress in our financial journey. The last perk of mint worth noting is that it’s owned by Intuit it allows you to automatically import your financial information into Turbo-Tax, making the process of doing your taxes much more efficient.

Personalcapital.com is another excellent online resource that caters particularly towards those with investments. It does an excellent job of helping you automatically track your spending and investments and understanding your total asset allocation. We would recommend this for those who want to easily track the performance of their investments.

Manilla.com is a personal finance program alternative. Instead of automatically grabbing all of your transactions automatically manilla functions more or less like an online file cabinet where you manually enter in and categorize your transactions rather than it doing that work for you. If you are concerned about online security this program is an excellent fit for you as it doesn’t require you to enter any of your online login information for your online accounts.

Whatever or however you choose to do it, the first step of developing your budget is to look critically at your spending, compare it to your financial goals and find resources to help you stay accountable.

ACTION: Find an online tool that suits you, plug in your account information and get an analysis of your spending. Use this tool to plug in goals and determine the amount necessary to reach your goals.

4. Let’s make a budget.

After we had determined our priorities and tracked our spending we set about the process of actually creating our budget.

It was liberating.

Many people wrongly assume that setting a budget is about limiting your lifestyle, we found the opposite to be true. When we set our budget we were free from the ambiguity that goes with spending money without a plan. Free from guessing how much we spent on food, guessing what we would have left in the account after bills were paid and free to have expectations and plans for our future. We found there were areas we needed to scale back, but it also showed us that we had more money than we realized to put toward our goals. Numbers became less intimidating.

Our first step (courtesy of Dave Ramsey) was to save $1,000 in our savings account as the start of our emergency fund. Saving that money was something we could do easily and quickly that freed us from the worry of an unexpected car repair or medical expense. We suggest you start with a small emergency fund as your first short term goal. Over time that fund should be built toward a full emergency fund or 3-6 months of your living expenses.If your monthly living expenses are $4,000 you should aim to have at least $12,000 saved in your emergency fund.

Unfortunately we live in a time where people lose jobs, have to move, or help out with medical expenses for a family member. These are situations in which having a good emergency fund is essential, it frees you from having to depend on credit cards, with their incredibly high interest rates, to bail you out in an emergency.

ACTION: Save a decent sum of money, ideally $1,000, in a separate account that is specifically for emergencies. This money should NOT be accessible when the opportunity for vacations, technology or other luxuries show up.

Our next step was to apply the concept that EVERY DOLLAR GETS SPENT. Now you may be thinking, “spending every dollar is a terrible idea; the fast track to bankruptcy,” but let me explain. What I actually mean is that every dollar of your income needs to go toward something, money that isn’t earmarked gets quickly spent on superfluous items. You can save yourself a tremendous amount of stress if you determine ahead of time where all your money is going. So when we set out to put together our budget, we determined not only what we would be spending on our monthly bills, but how much money will be be put toward each goal, saved for the emergency fund, and invested.

Here is the Maroni family monthly budget, our take home monthly income is around $3,560 and here is where every dollar goes-

  • Tuition for Krista’s masters program: $1,013
  • Jon’s student loan payment: $222
  • Additional money put to Krista’s loans while deferred: $450
  • Mortgage and rent: $400-I know this number seems low, read our post about our home and find out why.
  • Gifts and Donations: $375
  • Groceries: $200
  • Cell phone bill: $135
  • Gas and Fuel: $110
  • Insurance (auto, renters, life): $100
  • Contribution to Krista’s Roth IRA retirement fund: $100
  • Contribution to Jon’s 401 k retirement fund: $100
  • Contribution to our emergency fund: $100
  • Electric bill: $90
  • Gym Membership: $62-Read our post about why regular exercise is one of the best investments you’ll make.
  • Car repair fund: $60
  • Date nights: $40

ACTION: Look at your total monthly income. Record every monthly expense and designate the money necessary. Look at annual or bi-annual expenses (ex: insurance) divide these total yearly expenses by 12 and add that number to the monthly budget. Divide the rest between goals, retirement and savings.

5. Make it Automatic

A final word about budgeting, take advantage of automatic payment options. We don’t even have a checkbook because all of our bills are automatically debited from our checking account. Our rent check gets automatically mailed by our bank to our landlords, and the rest of our bills get automatically taken from our accounts. We have never missed a payment, and as such have avoided the fees and hits to our credit history that go along with missing payments. Your bills are already expensive enough, don’t add to them by missing a payment.

ACTION: Make it automatic. Set up all possible automatic debits and bill pays to keep yourself accountable and on top of your financial responsibilities.

There you have it, now it’s up for you to set your priorities, honestly track your spending and set your monthly budget.

How have you experienced the freedom that goes with setting a budget and sticking to it?

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4 comments on “How to Form a Budget

  1. Sherri Maroni
    April 30, 2013

    This is wonderful, Jon and Krista! I love that you start with your priorities. You also provide really great information, tips and easy to follow steps. I too have had people react negatively to the word “budget” when we’ve been in a discussion about money issues. But rather than feeling like we were making huge lifestyle sacrifices through budgeting, we felt like we’d actually gotten a raise because every dollar had an assignment. I love your new blog. Thank you!

    • jkmaroni
      May 2, 2013

      Thanks Sherri. You’re right, when you are able to assign every dollar to a category it literally feels like you are making more money. Budgeting is really about freedom, not oppression. What’s the saying “idle time is trouble time” its true for money as well. Money that sits idly doesn’t go to work for you. Thanks for your comment.

  2. Justin Bell
    May 17, 2013

    I love budgets!
    Budgets only get more important as your income becomes more irregular or on longer intervals.
    If your income is irregular, it may be helpful to prioritize budget items and have a contribution plan in place for surpluses.

    At my job i am fortunate enough to be salaried, so i know almost exactly what is coming in, unfortunately for me though i get paid once a month at the end of the month. Before i learned how to budget, i was so adamant about burning debt that i was throwing everything at it and had everything spent within the first week and would limp my way through the remaining weeks on a shoestring and floating myself with credit cards (smart right? NOT!).

    • jkmaroni
      May 17, 2013

      Justin, you are right. In situations where your income becomes more sporadic a budget becomes even more important. Also you need to incorporate attacking debt into your monthly budget. It is never a good idea to take on consumer debt (credit cards) in order to pay off other lower interest debt (student loans). If you put your money on autopilot and know where every dollar each month is going to be spent you can avoid putting yourself in this situation.

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