The biggest issue most people have when trying to fit in a budget is not seeing “the big picture”. The big picture is your income versus your budget.
Once you have the big picture you will be able to “see” what kind of budget you will need to fit in.
Most people fit in 4 categories: “Thrifty” (or extremely thrifty), “Thrifty but will splurge occasionally”, “the big spender” and “the hoarder“.
Believe it or not, these categories have nothing to do with how much a person makes a month. These are simply “behaviors” around money. The “big spender” is not necessarily a millionaire and you can certainly have a millionaire who is extremely thrifty. Ebenezer Scrooge, anyone?
Before preparing a budget or even considering a budget you need to know what you are and where you fit in those categories. Be realistic and honest with yourself. Dodging that question will only prolong the issues you are having with your budget.
Pretend you are going to an addicts meeting. Look at yourself in the mirror and say:
“Hi, my name is so and so and I’m a_________ (Insert your budget behavior here)”.
No one needs to hear it but you. You can do this in the bathroom, bedroom or in a forest. As long as YOU are listening.
Why should I be asking the budget behavior question?
If you are asking yourself that question you probably have a stack of bills and you are panicking about what to do with all of them. Or you are having a “guilt trip” about that trip to Europe (Should I stay or Should I go?).
Or you just can’t accept the fact that someone did not give you that 1 cent change at the grocery store and you are grumbling about it for 3 days.
Finally, do you live pay check to pay check because you buy collectibles? Things that you think or know are collectibles and sit on those things for years? Without negotiating them or using them (boxed Superman toys, anyone?)?
Who do I want to be on Budget Behavior?
Of course, most people want or should be in the “thrifty but will splurge occasionally category”.
The person in this category knows how much he/she makes, plans the bills and expenses. That person has just a bit left to save for something big and expensive, or for retirement.
There is a good balance of budgeting and behavior. Why? Because while we shouldn’t be throwing money away, life is short and it should be lived.
If you worked all year and lived tight to save some money to go to Europe, please go to Europe!!
Now, if you have an excellent salary but you count the number of toilet paper sheets you use when going to the bathroom (yes, I’m going there!) then you are extremely thrifty.
I know it’s your money and you can do whatever you want with it. I also agree that saving for a rainy day is an excellent idea. But it saddens me to think you are eating oatmeal for lunch and dinner. And you make six figures a year and won’t spend on anything! This is a bit extreme.
And in the end, you die and either someone else will burn that money real quick or it goes to the government. So, why not enjoy the fruits of your labor?
The Big Spender
The big spender usually has an average salary that could give him/her a comfortable life but that person’s life is surrounded by luxury she/he can’t afford.
I once knew a person who lived in an 800sq ft apartment and had 3 TVs! Oh, and he didn’t own them. He rented them!! Who needs 3 TVS anyway? (The guy was single too!).
Another person I knew owned a Hummer and was a stay a home dad. He said he was pursuing an “acting career” (nothing wrong with a stay at home dad or having dreams). However, it was not ok to see his wife driving a “beater”. And she was working two jobs because they could not pay their bills including that big Hummer!
Another characteristic of the big spender is high credit card debt and nothing to show for. This is a person who buys a lot of trinkets, purses, and expensive things that lose value as soon as they leave the store.
The big spender also buys or “needs” to buy brand names only. The thought of buying some secondary brand is “so last year” for that person.
I’m not talking about the ones from the TV show but some can certainly fit in that category. I’m talking about the toy collector, the comics collector, the car collector who has 20 cars in various stages of restoration but that are rusting by the minute and nothing gets done about them.
You don’t restore it, you don’t use it but it’s there. Taking real estate in your yard or your bookshelves and giving you no joy or money.
And the most absurd part of it all, the hoarder lives paycheck to paycheck and yet they are usually sitting on a small fortune!
Why not sell? Live better?
Wanna have a small collection? Sure, but when you can’t even feed the dogs because of your collection, you have a problem! Sell some of that stuff that you know you will never use, restore or play with!
Finding balance on spending behaviors
We all should strive to find balance in life. It’s not just starvation or big spending. You can have a comfortable life with very little and an uncomfortable life with a lot. So strive for a middle ground.
Now that we know who we are, it’s time to create a budget so we can at least find peace of mind knowing that we can “make it” to the end of the month.
The Bankruptcy Method of Budgeting (hear me out!)
I am going to show you how applying a “Bankruptcy” method of creating a budget will put things into perspective when it comes to balancing your budget.
Oh, and I’m not saying you are bankrupt or that you will need to file for bankruptcy when we are done (well, it may come to that for some). But it is eye-opening when you see how it works.
First, I need to explain the difference between the most common types of bankruptcies most people file so you can understand what a tight budget is and what a more flexible budget is.
The tightest form of budgeting is applied to a chapter 7 bankruptcy.
A Chapter 7 bankruptcy is the one where you eliminate all of your debts (with some exceptions and exemptions. And this is a very generic explanation).
Now, to qualify for this type of bankruptcy there is a certain budget that the courts allow and when comparing your net income (after taxes) and your expenses, there cannot be any money left to spend AFTER paying all of your BASIC* bills. You are either at zero or in the negative.
That’s why you fit in a Chapter 7. There is no money left to pay creditors.
If you find yourself in this situation after doing the Chapter 7 budget then it’s time to tighten the belt. Something it’s gotta give!
The Chapter 7 budget will likely reveal where you are spending too much on or where you are losing control on things.
Yes, I understand your salary simply may not cover everything. That’s why we will talk about tightening your belt here (yes, even more!).
The Chapter 13 budget
A Chapter 13 Bankruptcy is the type that you repay a portion of your debts (again with variations and lots of rules).
In this type of budgeting, you have the money to pay all of your BASIC bills and there is some money left over. If there’s money left over, why would anyone need to file a Chapter 13?
That’s where things get interesting and where a lot of people get in trouble. Yes, there is money to pay all the basic bills but not enough money to pay for credit cards and other “splurges”.
The person is simply overextended.
This happens a lot with people using credit cards and not realizing that they can’t even make the minimum payments. That is, your basic bills plus just the minimum payments eat all your income and more.
That’s why they fit into this category. A Chapter 13 repayment plan will allow some of the debts (not all of them) to be forgiven but you will still pay a portion of them.
The Bankruptcy Budget Outline:
–List all of your earnings: Salary (after taxes), rental income, overtime pay. List any and every source of income. Add the total.
–Outline all your BASIC bills: These are the “bankruptcy budget” acceptable bills (Do not include credit cards here).
The BASIC* bills are:
–Rent/Mortgage (does it include tax and Insurance?) This should not exceed 35% of your salary
–Utilities: Water, electricity, gas, oil (heating), sewer, trash, telephone (landline) and cell phone.
–Home Maintenance: This only applies if you hire a gardener to clean your yard or mow the lawn every month or a pool person. It also applies for minor repairs around the house.
This is a place where you can cut costs. Do you really need a gardener? Can you or the kids help with the lawn?
Can you learn to DIY some of these repairs?
–Food: This will vary per State-Some states have a very high cost of living. But this is another area that needs to be trimmed to BASIC necessities. Do you really need that candy or that expensive yogurt if you are trying to cut costs and make things fit within your salary?
Notice that if you cut “crappy foods” you may spend less in the long run even if you think fast food cost less than a head of lettuce. There are health considerations with that change too.
You eat better, you spend less with doctors. Not always true. but in most cases, you see a difference after a while.
–Clothing: Do you buy clothes every month? If so, set a budget for the year and stick with it.
For example: Say you select $80 a month for clothes. If you don’t buy anything this month, now you have $160 for next month.
If you budget it this way, you will see that you will have more money than you think and may even see that you don’t need all of that money to buy clothes. You may also find that you are spending way more than that amount in clothes per month (or week!), and that’s why you are “blowing” your budget.
Maybe visit outlet stores or consider overstock type stores. Stick with the basics to start: classic pants, shirts, underwear, socks, classic shoes. Buy clothes that are “neutral” in style and that can be worn for years.
Save the “in season” stuff as an extra that you can only buy if you were “good” with the budget the month before(meaning, you did not spend the whole monthly budget in clothes.
If you don’t require a business wardrobe consider the basics too: t-shirts, pants, socks, sweaters, basic shorts. Do you really need a brand name? What you could buy for $50 maybe available for $20 somewhere else just because of that label.
–Laundry and Dry Cleaning: Do you wear a lot of suits? If so, consider ways to rotate them so you don’t require weekly dry cleaning. For the ladies, maybe buy some classic pants that could be worn as separates with your suit jackets for example. It’s better for the environment too!
–Medical and Dental: These can really do some damage to the expenses unless you are insured.
But just like a credit card minimum payment, those co-pays add up if you have a medical condition and need to be at the doctor all the time. If the time is right, consider revisiting your health plan to see if you can get a lower cost plan and with better coverage for co-pays.
Of course, usually, the lower the co-pays the higher that deductible is.
Same goes for the insurance monthly payments (even if you are partly covered by your employer). For medical expenses, consider any out of pocket expenses such as co-pays, medications you need every month and maintenance fees for braces for the kids, for example.
–Transportation: You need to check your gas consumption per month, oil changes, tire changes. Do you drive for a living? Who covers the cost? Does your employer pay for mileage?
Try to stick to a monthly budget if all you do is go to work and back. Carpooling can save you some money too.
–Recreation: this is a “budget blower” for sure! Cable, Internet, Magazines, Newspapers, clubs, your subscription channels.
Do you really need all those channels? There are many “cut-your-cable” options out there nowadays.
Internet: This one is almost like the air we breathe.
Consider having home internet and watching your usage of data on the cell phone. Sometimes we are “LOL-ing” too much when we are out and about not realizing that we are paying for too much cell phone data that could be reduced if only we used that time to talk to people instead of staring at our phones.
I just “blew” my phone data this month because I went on a trip and used the phone GPS for directions on a 5-hour round trip! Yes, even us professionals mess it up sometimes!
–Insurance: Health insurance (if not covered by employer), auto insurance. Can you check for lower rates? I know, we put off doing these things and end up going for another year “just because…”).
Life Insurance (consider the type that allows you to have access to it instead of term life where the money just goes away if you stop paying).
– Taxes: if not deducted from wages or self-employment.
– Installments: car payment (consider buying an older car that it’s paid for).
Remember that a new car loses value as soon as you drive it out the lot!
There are excellent cars out there from private parties if you know where to look. If you can’t afford to pay for one out of pocket then finance it with your own bank.
You will be surprised how much money you can save. Plus you don’t have to deal with a car salesman pitch (no offense if you are one).
–Alimony/child support: another “budget blower”. But please pay your dues!
You don’t want to end up in court. However, if your financial situation changed, don’t wait until you are so far behind that now they are looking at wage garnishment.
That would certainly mess with your budget BIG TIME! Going to court may allow you to lower your payments and you will still be on time with your duties to your kid(s) and ex.
–Payments to support others: This can really mess with someone’s budget.
That family member who is always in trouble and you always “bail” him/her. Or your kid in college (does he/she have arms and legs?)
They can work!
Even if it’s just for a few hours a week to help out with some of their expenses. Think of it this way, if you had to work to survive college, they can too!
I know you want to be a good parent and help but if you are not meeting your minimum payments just so your kid can go to “Toga” parties and study, then you are not teaching them responsibility too.
Life is tough and if they don’t learn how to budget soon, they will never learn.
–Expenses for your business: if you are self-employed. (That’s another set of budget tips for another post).
–Miscellaneous expenses: Set a budget for lipstick, nail polish. For the guys: buying tools or any other extras that you like: lotion? New pens?
Make sure they are necessary and that you will use them until they are finished BEFORE buying a new one (I say this because I’m addicted to buying mascaras! Long lashes, volume lashes, you name it! I need to improve that for sure!)
– Contributions for retirement: This is important if you have any leftover money. If nothing is left then cutting expenses would certainly allow you to start this.
Even if it’s $10 a month. Put it away in a retirement account (consult your banker of course) and “forget” that money.
The list is extensive but you can narrow it down to your situation and expenditures and take control of your expenses.
The bankruptcy method of budgeting follows the guidelines from the IRS. Believe it or not, they have guidelines for expenses that you can use and they are even divided by States. That way you can fit your budget more closely to the cost of living in your State if it’s higher than the national average.
Here’s a link to the IRS site. Notice that the IRS budget is posted for collection purposes but you can use this as a guide if you are trying to fit into the “bankruptcy budget” I’m suggesting.
Don’t forget that when doing a monthly budget, start with your last 6 months of expenses as a comparison. That’s the only way you will figure out how to average things out like electricity (hot months versus cold) or seasonal expenses.
For example: If during the summer you use more AC and your bill is $400 a month for 3 months and during the winter it goes down to $100, then average it out by multiplying $400 x 3 and the average for the lower months and multiply that by 9.
So if on the higher months the total is $1200 and for the rest of the year it’s $100 on the average, then $1200 plus $900 = $2100 a year/12=$175 per month.
That’s is, you should budget $175 a month for electricity.
The months that the bill is only $100 you set aside that $75. When the higher months come along then you will have that money sitting there. You will be able to make ends meet when you get that $400 bill in the summer because you saved for it.
The same goes for every expense that you don’t spend every month like medical or home repairs, tire, and oil changes too.
I hope you use these tips to create and maintain a healthy budget. You don’t need to splurge all the time. Honestly, if you have a roof over your head, a warm bed, and food, what else do we need?
Click on the link below and get a nifty budget “cheat sheet”. You can use it to create your own budget and be on your way to financial stability.
Let me know if you have any questions or concerns about this style of budgeting. Oh, and don’t forget to check my friend HoangChi’s blog. She talks a lot about being a minimalist and living within your budget. She also has great advice on getting rid of excess stuff and even making some money in the process.
See you soon!