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