The Why and How of Budgeting

What is a budget and why do we need one?  A budget is simply a way to keep track of where your money goes.  The Google definition is: an estimate of income and expenditure for a set period of time.  The reason why it would be good to have a budget is simply so you can SEE or find out where your money is being spent.  You don't really know unless you see it on paper - exactly what goes where.  If you want to get anywhere in life financially, you need to name every dollar!

Now onto how you do a budget.  There are some numbers you will need to find out before starting your budget, so write these down in a place you can refer to whenever you need to readjust your budget.

  1. Income - how much money is coming in to your home in any given month.  If you don't know, look at your pay stubs or take the hourly pay and multiply it by 160 hours for a typical 4-week month.  Include any child support or any miscellaneous incomes into this number.  
  2. Expenses - this is anything that goes OUT or that you pay for, how often (weekly, bi-weekly, monthly, etc.) and if they are regular or just a one-time expense.  

Generally, you would do a budget each month but if your income and expenses are quite constant, you could probably get by with only doing a budget quarterly, or 4 times a year.  If you are like me and love to crunch numbers, well - you will be doing one quite often.

Here is a list of common expenses that almost everyone will need to budget for, I'm using the general categories that Dave Ramsey uses:

  1. Charity - this is where you would include tithe, offerings and any other giving.
  2. Savings - this isn't just what you hope to save in a savings account, this also includes retirement plans and other investments.
  3. Housing - includes rent or mortgage payment (and all that entails like property taxes, homeowner's insurance, etc.), renter's insurance and repairs if you own.
  4. Utilities - phone, internet, garbage, water, sewer, electric, gas
  5. Food - pretty self explanatory
  6. Personal - this is a catch-all for the needs, things like haircuts, toiletries, homeschool purchases and whatever else you feel that you need to purchase.
  7. Transportation - these are things to do with transporting you and/or your family that are needed like car insurance, gasoline and maintenance.
  8. Medical or Health - health insurance, dental insurance, medical bills, prescriptions, contacts, etc.  I also include disability and life insurance in this category.
  9. Clothing - budgeting a certain amount every month but you don't have to spend it each month, you can save it like we do and shop for clothes once or twice a year.
  10. Recreation or Fun money - whatever you do to have fun that costs money.
  11. Debt - all debt you have that is outstanding - car payments, credit cards, loans, etc.

Once you have your total income and total expenses written down, it is time to get down to crunching the numbers.  You will also want to know how much taxes are taken out each month.  I do our taxes each year, so I've calculated a certain amount that we claim and I know our tax rate, so I deduct that percentage from our monthly income. 

You only want to budget your total income MINUS your taxes - that will be your NET pay.  So starting with you net pay, subtract your expenses.  If you have money leftover, you need to place it into one of the categories and if it isn't needed - put it in savings in some form!  You should have what is called a zeroed-out budget - give every dollar a home.

Dave Ramsey recommends a certain percentage of your income towards each category and I did a pie chart to show you what this could look like:

Charity - 10-15%
Savings - 10-15%
Housing - 25-25%
Utilities - 5-10%
Food - 5-15%
Personal - 5-10%
Transportation - 10-15%
Medical - 5-10%
Clothing - 2-7%
Recreation - 5-10%
Debt - 0%