Don’t be Cheap, be Smart. Budget!
Good, you want to save money. Well it hasn’t been easier, especially with the internet. Now you can not only find good deals for what you need but automagically track all of your finances (Mint.com), optimize those finances (PersonalCapital.com) and make the most out of those savings (Betterment.com, LendingClub.com, etc…). We’ll definitely discuss the end to end ultimate money solution in time, but today we’re just going to focus on budgeting. Or in other words, your way to be smart with your money and never seem cheap. Don’t be cheap, be smart instead; create a Smart Budget!
What Matters to You?
Before we go into the details of Mint.com, lets talk about what matters to you. For me, it’s going out to eat, I’m kind of a foodie. If I were to stay home and cook every night I would absolutely save money but I wouldn’t be nearly as happy. Be it with my fiancé or my friends, we like good food and our drink tab is nothing to take lightly. That said, it’s all about moderation.
You work hard and you’re entitled to live and enjoy yourself. That doesn’t mean it involves spending every penny you earn. If you set some expectations for yourself you’re going to save a lot more than if you just fly by the seat of your pants. Decide what is most important to you, eating out, shoes, iPhone apps, you get the point.
Creating a Smart Budget
Ok, so we know what we want. Now we have to decide how much is enough. Of course I could justify to myself that it’s ok to go out to eat every night of the week but that would be unreasonable. We need to be honest with ourselves and control some of that pleasure so we truly appreciate when we do get to experience it.
First off, I just want to say that our end goal is to save 15% – 30% of our monthly take home. We can all easily excuse ourselves into the 15% category but I think you should strive to hit the higher goal. You wont always, but when you do your bank account will thank you.
To get started we’re going to create a high level budget. For detailed budgeting you can go over to my Budgeting for Dummies, the Complete Guide post.
Housing should be an absolute maximum of 33% of our take home cash. Utilities should be 15%-20%, so if your housing includes water/electricity/gas you can combine the two budgets allowing you to pay a bit more than 33% for your home/apartment. Don’t forget about cellular, Internet and cable in your utilities budget though as those costs can really creep up on you!
Housing and related expenses will likely be your largest category and that’s ok, you need a place to live and likely you spend a lot of time there so it’s important. If your housing is larger than 33% of your take home cash and it doesn’t include utilities then you probably need an intervention. Yes, we would all love to have the million dollar castle in Brooklyn, however most of us can’t afford it. Sure the banks (and landlords) will let us pay more than what is reasonable but that doesn’t mean that we should! Simply put, if you let that housing budget creep up you will just have less money for the really important stuff like food, and things of enjoyment. Don’t do that to yourself, keep it under control.
Beyond housing we have Food, Transit, Health, Shopping and Entertainment. For the sake of keeping it simple we’ll consider all other expenses to fall under these main categories. Shopping and Entertainment are easy because they are luxuries That means we can drop them at a moments notice when we’re in a bind and need to cut expenses. Since that’s the case we wont assign a percentage to them, we’ll just let them be floaters with the remainder of what is left from our monthly income after our primary expenses. Just remember, we’re carving out at least 15% for savings so don’t be sneakily buying cashmere with that money.
Food is tough because we absolutely need it, most of us love it and it’s really easy to over pay here. Personally, I like to go out so my food budget is a bit bigger than it probably should be but I lock mine in at a little under 20%. All that means is I get to spend a little less elsewhere (I only spend 26% on housing for example). You can definitely go a lot lower and I’m currently working on that area myself so I’ll come back and update you when I figure that part out. That said, I think you should easily be able to feed two adult mouths for $400 a month (breakfast, lunch and dinner). It breaks down to something like $2.20 per meal, not bad!
That leaves us with Transit and Health, two budgets that don’t get rules. For example, you may live in the suburbs while I live in the city. Getting to work monthly for me is $60 while for you it’s over $300. Or, you may have a Planet Fitness in your area ($10/month) where I’ve chosen to invest in personal exercise equipment as I can never get myself to actually go to a gym. It all really depends on you and where you live. You can try and reduce spending here, something I’ll eventually talk about in my How to Save Money series.
Stick to that Budget and Don’t be Cheap!
Remember, budgeting isn’t about penny pinching, it’s about staying on top of your spending habits. You’re not trying to make yourself miserable, you want to prevent leaks. Chances are you aren’t counting those 50 coffees you buy every day, and that’s ok. That’s why you have a budget! Set a goal like I will not spend more than $100 on coffee a month because that’s a lot. Then, when you notice that you blew past that goal in two days you’ll develop a razor sharp focus for not wasting cash. Because we all want money for the important things in life like taking our significant others out to dinner or buying a smart phone. If that means cutting back on some coffee related expenses then that’s a small price to pay.
Good luck, happy budgeting and don’t be cheap. Create a Smart Budget! Let me know how you’re doing in the comments!