Medical
Medical budgeting is difficult simply because one major problem can set you back a lot of money. As with other categories, this one can only be predicted based on past expenditures. However, if you know that a large unusual medical expense is in your immediate future, then be sure to account for it in your budget for the year. Let’s allot $200 per month for now and modify as needed later.
Transportation
Transportation expenses can vary greatly depending on how many cars your family owns and whether or not you still owe money on them. Also affecting these costs are how high your taxes are in your state and how much gas mileage your vehicles get. If you live in the big city and use public transportation, the frequency of use and the distances you must travel will determine much of the amount needed for this category. As we said before, be sure to include money for plane, train, and rental car expenses if you travel away from home frequently. Based on our past experiences, $600 per month is probably a good average number to use. If you like to buy all drivers in your family new cars every few years, then this number won’t even scratch the surface.
Insurance
This category covers every type of insurance you have except for homeowners, which is included in the mortgage category. These are things like homeowners, car, health, life, long-term care, and pet insurance. There are so many types of insurance to help protect you from loss that the cost can quickly get out of hand. Many of the premiums will be paid annually, semi-annually, or quarterly. For each, a calculation must be made to determine what the cost is on a monthly basis. For instance, if you pay $1000 per year for homeowners insurance, that would be $1000/12 or $83.33 per month. One of the most expensive insurance costs is auto insurance for a teenage driver. So, we’re going to estimate that total monthly insurance expenses are about $400 per month. If you are fortunate enough to have medical, dental, and perhaps even life insurance through your place of employment, then some of your insurance costs may be taken out on your paycheck. In this case, do not include these costs in your budget as you will only be adding your net income to the budget. Net income is your total income minus taxes and any deductions for insurance, union dues, etc.
Debts
Hopefully you do not have any debts apart from your home, cars, and maybe credit cards (which are all covered in other categories). If you do not, this category can be ignored. But since we frequently hear about young people having a lot of student loans debt, let’s include it for this exercise. Suppose you have $10,000 in debt that needs to be paid back with 4% interest. Further suppose you would like to pay this off over the next five years. To do so will require you to pay $184 per month. Let’s round this to $200 per month.
Personal
If you are married or have a partner, we think it best to divide this category into at least two, one for each partner. Let’s say your names are Jack and Jill. Also, if you have children, we recommend another category named—you guessed it—Children. Again, the money allotted to these categories is for the discretionary spending of the designated person. In the case of children, the parents will want to control the spending in the Children’s category. As these children get older, some of their designated money may be turned over to them, allowing them to make their own spending decisions. Assuming a family of four and allowing for $200 per person per month, that comes to $800 per month total.
Miscellaneous
This budget category is for those expenditures that simply don’t fall neatly into any of the other categories. For instance, a newspaper subscription. Hopefully there will not be too many of these type of costs, but you might be surprised how many of these can crop up in a month’s time. Let’s initially allot $50 per month.
Credit Cards
If you have been frugal and paid off your credit cards each month in full, then you do not need to allot any money to this category. As we mentioned before, whenever a new purchase is made with a credit card, you will simply transfer the money from the appropriate category to the credit card category. Then, at the end of the month, you will have enough money set aside to pay your credit card in full. However, if you are starting out with credit card debt, then you really need to begin allocating money to this column to pay off those debts. Let’s suppose that you owe the credit card companies $20,000 and the average interest rate you are paying is 14%. If you want to pay off these credit cards over the next five years, you will need to make payments totaling $465 per month. Let’s make the decision to allocate $500 per month and pay off the debt in 4.5 years.
Savings
The amount of money going into this category is simply your total monthly income minus the total amount allotted to all the other budget categories. Your goal, however, is to maximize this number as much as possible. If after allotting money to the other categories you find that you are putting a negative amount of money in this category, then something has to change. You will need to modify your lifestyle to live with less so as to reduce the amount being spent. As you pay off your debts, you will find that you can resume some of your suspended lifestyle.
Alright, we now have our initial money allocations for our sample budget. Let’s look at a summary.
Uh-oh. This is not good. Using the initial budget allocations results in us going into the hole almost $800 per month, which is over $9,000 per year. Clearly, some major adjustments need to be made. We’ll do just that in the next post.
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