My sixth rule of budgeting: Budgeting does not have to be complicated!

by Nick on August 3, 2010

When we first starting writing our budget, my wife and I got very detailed.  We had been keeping track of our spending for a while, so we categorized everything!  We ended up with so much detail in our draft that we weren’t even sure where to put some of our spending!  Things fit into two or more categories – simple things.  So we took a step back and looked around at what some of the financial advisers I respect recommend.  In the end we went with the Dave Ramsey budget – the light version.  It was a great starter budget with recommendations for how much to spend on each category.  It got us through the first month.  We still kept track of our spending in detail but put things in the categories recommended by Dave.  At the end of the first month we examined the spending in each category.  We then started customizing our budget for our needs.  After a few months it got better for us.  We are more comfortable with our budget now and it still is not very complicated – but it fits our lives.  So let’s take a quick look.

In general, Dave tends to be very conservative with his advice.  For example, Dave prefers you pay cash for real estate, but doesn’t complain if you take a fifteen-year fixed-rate mortgage where the payment is no more than 25% of your after-tax monthly income.  I don’t agree with that completely, but understand and appreciate his stance on that.  It’s a great goal.  I live in a very expensive part of the country and am not sure that would work here.  (I’m not one of those “never pay off your mortgage because you lose a tax deduction” person – that’s one thing on which Dave and I agree.).  Anyhow here is a very simple budget based on Dave’s budget lite:

  • Income: You all know my take on this – I prefer to put less than my take home and put the rest on auto-pilot;
  • Charity: This one is a must in my opinion.  It doesn’t have to be giving to a traditional “charity” but it’s important to me to set aside some percentage for charitable purposes (assisting someone you know in need, traditional charity, church, etc.).  My wife and I give approximately 10%;
  • Savings: Dave recommends an additional 5-10% to savings.  This includes retirement, college, emergency fund and investing.  I think this is low.  I suggest 30-40% between those.  (Note that we budget less than take home and that subtracting for charity and savings my budget is already down to 50% of take home.  I know.  It’s aggressive.  But we’re staying out of the mall on this site, so it’s doable in my opinion.);
  • Housing:  This includes all home-related costs (taxes, insurance, repairs and mortgage or rent).  It does not include utilities.  25% of the take home is the target.  Yes, you’re down to 25% and you haven’t eaten yet if you try and get aggressive and save 40%.  If you can’t, it’s OK, but save something – above the auto-pilot amount.  You can do it!
  • Utilities:  Dave recommends 5% for utilities.  I think this is high (depending on income, obviously).  If you’re making $30,000 per year you should not have three DVRs, all of the movie channels, six smart phones, the highest of high-speed Internet, central air set at 65 degrees in the summer and heating up to 85 degrees in the winter (and heating and cooling staying on when you’re not home)!  See what 5% of your budgeted income is and what utilities you can fit there.  You’ll be surprised how much you can do.  But you may have to prioritize!  I saw a great article how ceiling fans can change the feel in your room by a few degrees (that’s a lot of air conditioning).  I’ll do a post about saving on utilities at some point.  I’ve done quite a bit of reading about this;
  • Food:  5-10%.  Everybody loves a nice meal.  And I am a fan of the restaurant industry – I’ve mentioned it before, I have family and friends in the restaurant industry.  But we’re all about spending money wisely here.  Depending on your budget that may mean drinking the coffee provided by your employer, making lunch at home and skipping out on meals at restaurants (all meals) until you get your income up and/or your debt or other costs down.  Shopping wisely in the grocery store can save a lot of money too;
  • Transportation:   10-15%.  This is where a lot of progress can be made quickly.  It is very “nice” to have a new car.  It’s “nice” to have a fancy car.  But it’s “smart” to have a car you can afford – one that gets you where you need to go (and back…).  A car is not an investment.  It goes down in value.  (We’re not talking about collectibles…).  Ideally, you would save up and buy a quality used car for cash.  If you have a lot of debt, it might mean driving – GASP – a not-so-gently used car – a piece of junk.  I drove a car that was worth less than $1,000 for five years (it was worth less than $1,000 at the beginning of the five years…).  I loved it!  My friends made jokes, but I had fun with it.  Bonus – your friends will want to drive when you’re driving together saving you on gas and wear and tear!  This category also includes subway and other public transportation passes.  There are some great commuter programs out there, so some commuting costs may be tax deductible.  As your employer about these and see what’s available for you;
  • Clothing: Dave recommends 2-7% for clothing.  I agree with Dave that a small clothing budget is necessary.  Designer clothes are not!  (Bonus tip – We cut down or avoid dry cleaning clothing as much as possible and have saved a lot of money over time.);
  • Medical/Health:  Dave recommends 5-10%.  This includes health insurance, disability insurance, doctors bills and medicines.  This may be be tight.  We fit it in, but have great insurance through the day job.  There are a lot of programs out there for this one too, so do some research and see what’s available to you.  Don’t just accept spending too much because you don’t do enough research.

The bottom line:  This budget is very simple.  It is only eight spending/giving/saving items.  It works.  It is conservative, but allows you to save for a rainy day or to achieve your goals – and financial freedom!

Note that if you add up the percentages you could easily get over 100%.  Why?  Because the budget is flexible.  This gives you a guideline for each type of expense.  If you budget towards the high end of clothing, you may need to budget less on one of the others.  If you go tight on housing or utilities you can budget a little more on food or save more.  You see the point.

The most common question about this budget is where do vacations go.  Those are in my savings part of the budget.  The second most common question is where is debt repayment?  What debt repayment?!?!?!  Seriously though – it would come out of each of the items.  How?  Spend less on everything you can and annihilate the debt!  Go to the low end on as much as you can and attack the debt until it’s gone!  Any other questions?  Send them to me using the “contact me” function on the top right or put them in the comments!  What do you think?  How simple is your budget.

So until next time – put the credit card down and slowly step away from the mall!

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