Budgeting Basics – Spend Less Than You Earn

Ok, I’m going to talk about the dreaded “B” word – budgeting.  If you want a better connotation for the same thing, use something like “cash flow.”  It’s all the same.  Budgeting is a necessity in life that most people just don’t grasp (or don’t want to even try).  It’s really simple though: simply spend less than you make.  That’s what it all comes down to.  I’ll help you get started though.

First, start tracking every dollar you spend.  This includes everything from mortage, rent, car payments, and insurance to buying groceries and eating out to morning coffees, sodas, vending machines, etc.  Everything you spend needs to be tracked.  You can use a program like Quicken or YNAB to do this, or you can simply use a spreadsheet like Microsoft Excel or Google Docs.

Once you track your spending for one month, take a look at where your money has gone.  Add up all your expenses, and add up all your income.  Did you spend more money than you brought in for the month?  If so, you aren’t alone.  This is the reason why most people have so much money on their credit cards.

Start looking in detail at where you spent your money.  Where can you cut back, even if it’s just a little next month?  Did you eat out a lot this month?  Maybe you could cut it back, even if it’s just $10 or $20.  Do you eat out every day for lunch?  Maybe you could pack your lunch a couple days a week.  Do you spend money on things you don’t actually use, like a gym membership, Internet usage or text messaging on your cell phone?  Those premium channels, like HBO, Showtime, etc?  Do you get coffee at the local Starbucks, or buy a soda every day at work?  If you find things you are paying for that you don’t use, try removing one of them next month and see how it goes.  You may find out that you really can live without it.  If you find yourself wishing you had it back, add it back.  Try cutting one big item out of your spending for the next month, and try to cut back 10% on one additional item (such as eating out). Doing this starts you down the path of living on less than you earn.  Once you start thinking about things in this manner, you’ll be able to find lots of little ways to cut back that can end up saving you a lot of money.

Okay, so now that you see where you’re spending your money, how does it compare to what it should be?  Group everything into a high level category of fixed costs (such as mortgage, rent, utilities, car payments, credit cards, groceries, gas, etc.), fun money (eating out, drinking, clothing, etc.), retirement (401k, Roth IRA, other investments), savings (emergency fund, vacations, house down payment, etc.), and giving (Christmas presents, birthday presents, religious giving, etc.).  This gives you an idea of how much you should be spending in each category:

Fixed costs: 50 – 60%
Fun money: 15 – 30%
Retirement: 10 – 15%
Savings: 5%
Giving: 10%

After only one month of tracking, you may not fit directly into these categories.  After tracking for a while though, you should fit pretty close.

If all that seems way too complicated, simply live off of 80% of what you make, and put the rest toward giving and saving for retirement.  It all comes down to one simple thing: spend less than you earn.  If you can get to that point, things will be much easier.  You will be able to pay down your debts, start to save money, and you will not be stressed about money as much.

Merry Christmas!

I love everything about the Christmas season.  I’m not sure what it is, but it’s a magical season for me.  Maybe it’s because it was always my grandma’s favorite season, and I think of her a lot this time of year.  I love seeing my family, and my wife’s family too.  I love listening to classic Christmas music the whole season: while I’m at work, while we’re wrapping presents at home, and while we’re driving to our destinations.  I love it when it snows, because it makes me really excited.    I love decorating both the inside and outside of our house (we finally got a nativity set for outside, thanks to my mom finding it at a yard sale over the summer).  I love getting a real tree inside, and putting all the wrapped presents under it.  I love picking out a new ornament that has some special meaning for that year, and adding it to our collection on the tree.  I love watching classic Christmas movies every year, and quoting the really good ones throughout the whole movie (ahem, Christmas Vacation).

I love taking the time to wrap presents so they look almost perfect, because I believe the presentation is part of the thought that goes into the gift.  I love loading up the truck with presents, and driving to both our families.  I love giving gifts, and watching the looks on people’s faces when they open them.  Every year, it seems that there’s one or two gifts I get really excited about because I know people will love them.  This year is no exception.

One year, I had a great plan for Christmas.  I got Megan (my girlfriend at the time, now my wife) lots of kitchen stuff (which she did want, but it was just kind of boring).  The last present she opened was some measuring spoons, and I told her I thought there was one more present buried in that box (it had lots of newspaper and bubble wrap in it).  She kept digging and didn’t find anything, so my response was “I THOUGHT there was another one in there… Keep looking.”  She eventually found a little white cardboard box in the bottom.  She opened that box, and it was another wooden box.  She still had no idea what it was, until she opened it up and saw an engagement ring inside.  After seeing the look on her face, I was so excited I was speechless.  I just cried and gave her a huge hug, and said, “Megan Jo Ruths, will you marry me?”  Luckily, she said yes, and the rest is history.

Whatever you do this Christmas, make sure you get to spend some time with your family.  They’re the only one you’ve got, and spending time with them makes this season even more special.

Miss you Grandma, but I promise I’ll be thinking of you the whole season.

Merry Christmas everybody!

Christmas Budget

If you’re like most people, you run up your credit cards during the Christmas season.  Hopefully, you don’t still have money on your credit cards from LAST Christmas.

For my wife and I, Christmas is a large expense.  We exchange gifts with parents, grandparents, brothers and sisters, and nieces and nephews.  We found a system that works really well.  I created a spreadsheet with the names of people for whom we buy gifts.  I list a dollar amount for each person, and that’s our budget for Christmas.  When we buy a gift, I record the total (including tax and shipping, if applicable) into another column, and we make sure we don’t go over the budgeted amount.  I also keep a little column for what the items actually were.  When Christmas is over, I wipe out all the information, so it’s ready to go for next year.

So, we have this budget we use every year, but how do we avoid going into debt with all the gifts we buy?  We save 1/12 of what our budget is every month.  You can do this in several ways.  You could open a separate account, and automatically transfer 1/12 of your budget into it on the first of every month, or you can use a more holistic approach, and budget all your expenses every month.  I’ll cover budgeting more at a later date.  This approach eliminates all the stress the holiday season puts on your finances.

If you are one of the millions of people who get stressed out about money this time every year, take the following steps to be able to really enjoy the next Christmas season:

  1. Create a list of everyone  you bought (or are planning on buying) a gift for this year, along with how much you spent (or plan to spend)
  2. Create a new spreadsheet (you can use Google Docs if you want, it’s free!) with the following columns:
    – Name
    – Budgeted Amount
    – Amount Spent
    – Items
  3. Fill out the Name and Budgeted Amount columns for each person on your list
  4. Set up a savings account (call it Christmas)
  5. Set up an automatic transfer on the first of every month, starting in January, that’s 1/12 of the total amount of what’s in your Budgeted Amount column

Then when next year rolls around, just pull the money back out of your savings, and you will have a stress free Christmas season (well, financially… I can’t speak for the other things that could cause you stress during this season).

My First Post

Welcome to my personal blog.  I will talk about my life, along with some personal finance stuff along the  way.  This blogging thing is new for me, so bear with me while I get it down.

Today, I’m going to talk about this book I just read called “I Will Teach You to Be Rich.”  It’s a really cheesy title (and a cheesy cover), but I heard about this Ramit guy, and wanted to hear his opinions on personal finance.  I started reading his blog – iwillteachyoutoberich.com – after hearing him speak on YNAB, and wanted to get his book.  He was trying to sell a multi-thousand dollar class, but I decided to simply spent $9 on Amazon.

The book was definitely targeted toward people in their 20s, who are just starting out with finances.  It covers all the basics, and covers them well.  If you’re just starting to manage your money, it’s a good read.

I figured that I already knew most of the stuff in the book, but wanted to see his opinions on how he manages his money.  In case you don’t know me, I’ve been budgeting our family’s money for a while now, and have become obsessed with personal finance.  I’m still new to investing, so I really wanted to read that section in Ramit’s book in particular.   I just took my retirement funds and threw them into a targeted date fund at T Rowe Price and Vanguard, and left them alone.  I was really surprised to find out that’s the exact approach he recommends too.  He did have an advanced section that discussed index funds, which I think I will end up setting up at some point.