Charity, Gifts, Mortgage, House Upkeep, Home Decorations, Utilities, Communications, Food, Medical, Transportation, Insurance, Debts, Personal, Miscellaneous, Credit Cards, and Savings
What needs to be done now is to decide how much money you plan to spend each month in each of these categories. However, as we have said before, we do not recommend entering expenditures on your budget spreadsheet every month. That is too infrequent. We believe that twice a month works well. It keeps each spreadsheet at a reasonable size, and it is frequent enough to make course corrections should you find yourself overspending in some categories. So, once the monthly allocations are made, these numbers can be divided in half to determine the semi-monthly budget numbers.
For the remainder of this chapter we will allocate money to the above categories based on a made-up household income. Statistics show that the median household income in the US is currently about $50,000 after taxes. So, that is the number we will use for our sample budget. Since it is rare that both spouses have equal incomes, we will assume one spouse clears $30,000 and the other $20,000 just to make things interesting.
What we will do first is make a monthly allocation to each of the budget categories. This is best done by going through past expenses and estimating how much was being spent in these categories, then making initial allocations based on those numbers. If we find that our income is sufficient to support those level of expenditures while still saving a significant amount, then we are golden. If not, then choices will have to be made about where to cut.
If you work a job where the hours are inconsistent, thus causing your income to go up and down over the course of a year, then budgeting will be more difficult. In this case, you must estimate what your total annual income, after taxes, will be and go with that amount. You should estimate on the low side. Then, if your income is actually higher, you will have more money to put in savings. At any rate, let’s still assume that your total estimated household income is $50,000 and get started.
Charity
If you prefer to actually base your charitable contributions on a percentage of your income and you have a job where your income fluctuates a lot, then you may not want to budget a monthly amount for this category. Rather, when you receive a paycheck, you can simply allot money to this item based on how large the paycheck is. This can make it more difficult estimating how to spread your money across the other categories, so we recommend against this if at all possible. Let’s suppose your past giving was about 5% of your income. At a $50,000 income level, that calculates to $2,500 per year or about $210 per month. Let’s start with that amount.
Gifts
Most people like to give gifts to friends and family at special occasions such as birthdays, Christmas, graduations, weddings, or anniversaries. Many people don’t like to be bound by a budget when giving gifts because they want to be able to purchase whatever is meaningful at the time even if it’s a bit expensive. However, if you’re going to manage your money, spending in this category needs to be controlled just as much as in the others. Let’s set an initial budget of $80 a month. If you have large families and lots of friends, you may want to up this if you find out you can afford it.
Mortgage
Since you are probably making a monthly payment on your home loan, this one is easy to determine. It’s whatever that monthly payment happens to be. We are assuming that the mortgage payment includes enough money to cover homeowners’ insurance and property taxes. Let’s suppose the minimum amount you can pay on your house is $500 per month. This is the initial amount to allocate for the mortgage category. If you later discover that you are putting more than enough money into savings, you will probably want to increase the amount you pay on your mortgage. This will allow you to pay it off early and save money on interest. Make sure your mortgage contract allows increased payments with no penalties. Also, keep in mind that you will want to pay off higher interest loans and credit cards before increasing your mortgage payment. It makes no sense to make higher payments on a low interest loan when that money could be used to pay down higher rate loans.
House Upkeep
This category is difficult to determine since it is impossible to predict what repairs might be needed in the course of any given month. But an educated guess can be made based on past expenses. Let’s allocate $100 to begin with. Adjustments can be made as needed in the future. If any unexpected repairs costing lots of money are needed, you may have to use money from savings to cover them. This is why it is good to have a healthy amount of money in savings. It will allow you to handle contingencies without putting you deep in the red.
Home Decorations
This category is a nicety rather than a necessity. Money from it goes towards things to beautify your home. Of course, if your income is too low to cover necessities and niceties, then the niceties need to be eliminated first. So, let’s start with $50 per month, then decrease it later if we find that we simply can’t afford this amount.
Utilities
Although this is a necessary item, it is also one that can be decreased by making adjustments to your lifestyle. The money allocated to this category needs to cover the total cost of electricity, gas, propane, water, garbage collection, sewage, recycling, and anything else of this nature. Basically, any type of service provided to your home by the city and county where you reside. Of course, monthly bills vary by seasons of the year. It’s much more expensive to heat or cool a home in summer and winter than in spring and fall. So, what is needed is an estimate of the yearly cost of these goods and services, then divide that number by 12 to get a monthly amount. Let’s say this number is about $250 per month.
Communications
It seems that just about everybody has a cell phone these days regardless of income. But cell phones make up just a portion of your communications budget. This category also includes land line phones, TV satellite or cable, Internet service, pagers, and anything else that serves a communications need. With all the different services available, this category can require substantial amounts of money. For a family of four, communications costs can easily reach $400 per month. So, let’s use that number.
Food
As we said before, this is the budget category that our family has the toughest time balancing. We all stay pretty busy, so we tend to want to eat out more often than we should. We use restaurant coupons as often as possible as this saves us a lot of money, assuming, of course, the alternative was eating out without a coupon. Even though dining out can be quite expensive, it seems that grocery prices are themselves quite high. We sometimes go into the grocery to get just a few items and suddenly realize that we needed more than we originally thought, and end up spending twice what we expected. Even so, buying and preparing your own meals will, in general, be significantly cheaper than eating out. Randy just recently saw a lady on TV showing meals that can feed a family of four for $5.00. For three meals a day, that is $15 per day or about $450 per month. Most people will want to eat out at least once per week. So, let’s initially allot $600 per month. If you find out you can’t even afford the $5.00 meals three times a day, you may have to plan a lot of PB&J sandwiches and Ramen noodles.
Okay, we are about halfway through the budget categories. In our next post we will cover the remaining categories and see where we stand in relation to monthly income.
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