Hey guys, Mike Frontera here, back with another edition of Retirement Theory. Now look, I get it. No one likes making a budget. A lot of people cringe at the word itself. Budget. It sounds cheap. Like you’re going without. No steak tonight, we’re on a budget. Shut those lights off, we’re on a budget. You get the idea.
While budgets can actually help make life a lot more enjoyable, they still get a ton of hate. For those who pooh-pooh using a budget, there seems to be two major roadblocks that cause most of the problems.
One: budget too complicated. There are thousands of budgets online: spreadsheet templates, software, budgets with linked bank accounts and so on. Most of these are geared though, toward people who naturally love to track their spending. Folks who like to make charts and graphs and track how much they spent on chewing gum last November.
Well, in a moment I’ll show you how to make a budget that is so simple, anyone can set it up. It’s not overwhelming and what it lacks in sophistication, it can more than make up in the fact that people can actually use it.
Second issue is that people feel restricted by a budget. People worry that if they make a budget and stick to it, it means they will have to cut back on everything they like to do. All their money will go to bills, debt, and savings. Maybe a sack of potatoes for the family to subsist on until next month.
This is a huge misconception so it’s important to address. With a simplified, easy-to-follow budget you should feel more freedom than ever. Without any structure around your cash flow, you’re way more likely to feel guilty about every dollar you spend, because you don’t know if that dollar was supposed to go to some higher need. But laying out a simple budget solves that and lets you know how much can safely be spent on anything you want! No matter how frivolous it may seem!
OK, so let me show how to do set this thing up. You can use a spreadsheet program like Excel, or just a simple pen and paper. There are four steps. And I give each step a letter. P-E-S-O. That spells Peso, just like Mexican money!
Start with P. P is for pay. So you total up your household’s take home (or net) pay. For those of you who do not have a steady paycheck, what you’ll want to do is go back and look at the last 12-months or so of your net income that you’ve deposited in the bank and take an average of those amounts. That way you’ll smooth out the bumps. Let’s use an example of $6000 per month.
Next is E, as in Expenses. Here you’ll want to total all your bills that you are committed to pay. So you might have things like: mortgage, property taxes, rent, utilities, cable, loans, etc. If you have credit card debt, only include the minimum monthly payment that must be made in this total. Also be sure to look through your records for any bills that come in annually or that get paid periodically, like insurance premiums, house maintenance items. Now you convert any of those annual amounts to monthly amounts just by dividing by 12. Alright so in this example, I’m going to use $3500 per month.
Next is S, as in Savings. This category is important. There’s no hard and fast rule on what this number should be but keep the following in mind. First, if you have any high-interest (especially credit card debt), you should commit to put a certain amount toward that debt in this column. Also, if you do not have a sufficient emergency fund to cover a good 3-6 months’ worth of income, you should be committing additional capital here for that. If you are saving for bigger expenses, maybe you’re budgeting for a family vacation, major home repairs or renovations, count that number under this total. Finally, if you’re not contributing to a retirement plan through your paycheck, you may need to allocate some money here to save for that need as well. Now, I’ve seen that category vary quite a bit for people, but a total somewhere around 20% of net pay is not uncommon. So let’s go with $1200 per month here.
OK, so now we take P and subtract E and S from it to get $1300 which represents that last letter, O. Which means “Ours to spend”! This is the money that you can use however you want. Now, if you haven’t allocated for food and clothing, remember that this money has to cover for all of your other expenses. But it’s there, and you don’t need to feel guilty about spending all of it.
So…do you have questions for me? Let me know. Give me a call at (518) 612-1060, or just visit www.retirementtheory.com . Do you follow me on Facebook? I think that you should. You'll see videos like these, and get blog and article shares on everything retirement planning. Once again, thank you for joining me. See you next time!