Creating a Workable Budget

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Creating a budget is the only way to make sure that you are living within your means. Living within your means is VERY important if you are motivated to be in a low-risk situation and to get out of debt! But sitting down for the first time and writing a budget isn't always easy. How much is realistic to put in each category?

First, we'll look to Dave Ramsey, the financial "guru" we've been following. He's a self-made millionaire, so he knows a thing or two about making (and keeping) money.

Giving (charity) = 10 - 15% of income
Savings = 5 - 10% (Ramsey does recommend saving only $1000 as an emergency fund, then putting this money towards debt until it is paid off)
Housing = 25%
Utilities = 5%
Food = 5%
Transportation = 10%
Clothing = 2%
Medical/health = 5%
Personal = 5%
Recreation = 5%

If you use the lower end of that, it's only 77% -- the rest should go to debt, if you have any, or towards savings/giving.

Although this is a good start, there may be some realities to face in budgeting that you just can't get around. For example, our house payment is about 40% of our take-home pay. That's just how it is; so we have to cut other categories to make up for this. Luckily it all still works out. If you commute a lot of use taxis, your transportation might be higher than others. Or, you may have more medical expenses (that's a separate post entirely, my opinion on that...). But, you must first face what these realities are.

So, sit down with your spouse and write down ALL your essential, non-negotiable items. House, cars, utilities, etc. This can be a frustrating exercise sometimes. When we first sat down to do this, we just did not make enough money! But it got better. If you find that you don't make enough money, perhaps you can find a way to work some extra hours, take a second part-time job, or have someone work from home. I taught music lessons and did freelance writing for awhile, up until a few months after Bekah was born, to make a little extra money.

Then, look at your negotiable expenses. How much can you afford on groceries? How much for "personal" money, or entertainment, or clothing? Groceries are an absolute "must" but it can be easy to spend quite a lot -- or not as much. Personal, entertainment, and clothing are typically not "musts," unless you have growing children, but then you can shop around on Craig's List, or at Goodwill, or Once Upon a Child. Or garage sales, if the season is right, or even borrow from a friend! We'll discuss specific ways to cut these variable parts of the budget in another post. What we did was not have any personal, entertainment, or clothing money for awhile (we didn't have kids then). We still don't have much personal or clothing money, and no entertainment. The more you can cut back, the faster you can pay off your debt (if you have any).

So, let's look at an example.

Suppose you make $2000 a month, take home.

Rent = $700/month
Utilities = $50/month
Savings = $0
Giving = $200/month
Food = $300/month
Transportation (insurance and gas) = $300/month
Clothing = $50/month
Personal = $50/month
Entertainment = $50/month
Medical = $50/month

All of that adds up to $1750/month. The remaining $250 can be put towards debt, or used on any "unusual" expenses, like unexpected medical expenses, etc. Or, it can be put in savings if the debt is paid. This picture is assuming renting, not paying a mortgage (a mortgage would be over $1000, typically, too much for this family's take home pay), and it's assuming no car payments (which is, unfortunately, not the case for most -- although we own our cars!).

It may take some haggling in the "entertainment" and "personal" categories too. Typically one person likes to spend more, and the other likes to save more. It requires a balance, because if you save too much and NEVER have fun, you won't enjoy life much. But if you always spend and never save, well...come rainy days, you're in big trouble.

Remember to have lots of communication when creating this budget, because you BOTH have to live with it.

Ramsey suggests an "envelope" system, where you put the month's money into different envelopes labeled for each category. When the money's gone, it's gone. No borrowing, no extra. We use a couple different debit accounts, which have only exactly what we are allowed to spend in them.

How do you create your budget? Was it difficult to agree? Is there any other budget or money-related idea you'd like me to post on?