Budgeting is a plan we make for our spending. The plan itself is called a budget. Budgeting is the key to organize your daily, weekly, monthly or even yearly expenses. If one plans how to spend their money, it helps them save money as well.
Why is budgeting important?
Budgeting is important because, every person needs to earn and spend money in the cycle of life to survive. If we plan the right way to spend money, we will not spend money on unnecessary or unimportant things and will rather save money for emergencies, retirement, education, health etc.
According to the 2014 survey conducted by the National Foundation for Credit Counseling, 56% of Americans don’t have a budget. According to mybudget360.com, an average American earn about $38000 a year. After taxes, they end up with a monthly income around $2500. The 56% of American who are not making a budget are more likely to spend it all than those that create a budget.
Example of a simple budgeting
Now let’s have an example: Mike earns $2000 each month after taxes and has a monthly car payment. What will his monthly expenses be? An average monthly rent for an apartment runs around $700 in small towns. Utilities like water, sewer, electricity and gas for a 1-bedroom apartment cost about $150 a month. A cell phone costs about $50 on average, but can easily be higher. Groceries can costs around $300 per month. The car payment is $200 for a second hand car. Gas average would be $150 a month. Car insurance is $100 each month. Mike also has a credit card he doesn’t use anymore, but wants to pay down his balance on it, so he pays $100 each month.
Taking just these factors into consideration, the monthly expense is $1800. Since he makes $2000 each month, he has $200 to put towards something he wants. This could be to pay down the debt. Maybe he wants to save the money for a future emergency.
Mike writes all of these things down along with comments on a notepad or the computer to track everything. His budget may look something like this:
Lease ends in November
Budget more in hot summer months.
$3,000 left on loan
Minimum Credit Card Payment
Pay off credit card debt
Budgeting is different for different people based on their incomes and expenses. Although there are many ways you can budget, below are some of the ways to budgeting.
Classic Way – As the name suggest, you can make a list of all the expenses and deduct it from your monthly income. If the income is less than or equal to your spending you may want to reduce your spending in some categories. You can limit your spending in all the categories such as miscellaneous expenses of eating out, movies, fun and entertainment. This will help you save in small amounts but make a big difference in the end.
The 50/20/30 budget – This budget helps as a guideline for people that don’t know if they are spending too much on certain things. This kind of budgeting is also a simple and good way to get your monthly expenses on track.
50% of your budget should be for fixed or main expenses that happen every month that you can’t get rid of easily. This includes rent/mortgage, car payments, utilities, gym memberships, Netflix, etc. Overall, the total of these payments should not be more than 50% of your total paychecks in a month.
20% of your budget should go toward financial goals like building up an emergency fund or saving for retirement. You want at least 20% of your current self to be helping out your future self.
30% of your budget then is saved for flexible spending. These are the day-to-day expenses that can vary from month to month. This can include groceries, gas, shopping, eating out, birthday gifts, etc. You will want these expenses to be less than 30% of your income. If you find it higher than that, try eating out less often and cooking from home.
Rent or Buying a home
When asked the above question, different people have different answers depending upon their need and income. A family of 2-3 people would probably require a 2-bedroom apartment whereas a family of 4-5 would require a bigger place to live. But not everyone can buy a home as income plays an important role. People might argue saying that if you a purchase a home today, you are building equity and someone when you sell the home, and you might get more money back than you invested. So lets see what are the cost associated with both the options.
Rent an apartment:
Initial Deposit: This is a security deposit and the amount ranges from company to company
Monthly rent – Rent again depends upon location
Water and Sewer – these costs are sometimes included in the rent while sometimes its not.
Extra expenses – Depending upon the condition of the apartment when you leave, you might be asked to pay for any damages or the rental company may not return the security deposit back.
Own a home:
Initial cost: this includes your closing cost, down payment and other administrative fees
Mortgage and taxes: this is a reoccurring cost that you would pay every month depending upon the loan that you have taken to buy the house
Water and Sewer – These cost have to be covered by you
Maintenance of the home – This is like a hidden charge and may surprise you anytime with a broken pipeline of water or plumbing etc.
Return on investment – this would be the price you would receive on selling your house, but would included the expenses on selling it as well, for example realtor’s fee.
Both the options are good but it all depends upon your monthly income as to which is most feasible for you.
Technology has come a long way in the last 5 years, and now to make things easy and simple, we have many budgeting apps available where you just need to enter your expenses and your incomes, and the app will work things out for you. Some of the budgeting apps are:
Mint:Money manager, Budget and Personal Finances
Daily budget original
Goodbudget budget planner
All of the above are free access on any smart phone.