When it comes to managing money, the argument for nature vs. nurture comes to mind. Some people inherently know how to use money efficiently and effectively, while some simply do not. This guide is intended to spell out methods of using money in a way to keep more of it in your pocket and also at times make it seem like there’s more than it really is. A general tool for managing money is a budget: a cyclic plan describing how much can be spent on what with the goal of under-spending in regard to your income. Under spending is when you spend less than you make, and over-spending is when you spend more than you make. The remainder of this article will describe how to make an initial budget and caveats to the process as well as a sample budget.
PART I – Working to Make your Money Work for you
If you’re creating a budget from scratch you’ll first need to have access to old purchases made over the course of two months; this is easily accomplished by making all your purchases with a credit or banking card so you can access them online or with a monthly statement. Once you have your data you have to categorize how you will spend your money. My advice is to make as few categories as possible that can encompass any and all spending you might do in the future so your budget is always applicable. Some expenses are somewhat out of your control: bills, debts, and living expenses; these are concrete categories. Other expenses are wholly in your control: groceries, gas, purchase; these are malleable categories.
For example, in my budget, I’ve created five categories:
- Bills (Concrete) – These are things like living expenses and utilities. Given a stable situation, all the items in this category should be highly predictable, both in amount and when its due.
- Savings (Malleable) – This is in fact, an expense. This is money you put away and don’t plan to spend. It’s malleable because you can choose not to save.
- Recurring (Malleable) – These are expenses you have weekly which are really dependent on circumstances. The general idea is that they will happen and you have to pay for them (e.g. groceries and gas).
- Purchases (Malleable) – this is a catch all for anything that doesn’t already have a category. This can be further segmented later if necessary.
- Overflow (Neither) – this is an important concept. Overflow is another word for expendable income, but in general this is money that you don’t spend that has no purpose. Overflow is a measure at how well you under-spend. This can also amount to zero if you break even or over-spend.
Once you have your data and the categories you want to use you have to decide on the time-span for your budget. Usually a budget is made on a month-to-month basis. Sum up each of your purchases for every category, then average the two months together. This should give you a general number for how much money is required for each category. Do the same for your income only using periodic income that is guaranteed (e.g. wages/salary) and not intermittent income. Your income along with the total average of your purchases for the last two months will give you a general idea if you over-spend or under-spend.
Best-case scenario: You under-spend by about 20% meaning that a good chunk of your income stays in your pocket and isn’t being spent. This is a healthy margin of error in which you can do a number of things with. At this point you haven’t budgeted for savings, and knowing that you have 20% of your income left over, you can “spend” 10% of it and save it. Savings is an expense because you can’t spend it on anything. The left over income is important because it can absorb any small variability in expenses like utilities being expensive in the summer months.
Worst-case scenario: You overspend by 10%, this means that you can’t save and that you have to reduce expenses in an attempt to under-spend or at least break even. You can reduce the amount of money spent by looking closely at your malleable categories and finding what behaviors can be curbed to reduce spending. One of the easiest ways to trim the fat is to develop routine terms of what you eat and where as well as what you buy. Planning to go out once a week is easier to budget for than going out at the spur of the moment. Eating in, planning meals instead of getting fast food saves money to an extent. Splitting bills or dating gentlemen (if you’re lady) might be a way to reduce spending on going out. If you smoke cigarettes and don’t’ plan to stop, buying cartons may help you save some money. If you have to reduce expenses in concrete categories such as utilities and rent you may have to get a new place. How much space do you really need, more space automatically equals high utilities because you have to heat and cool every square foot.
The following is a Sample Budget:
The sample budget under-spends by approximately 15%
A good budget is one that works. A good budget is consistent over time meaning that the money you set aside for each category is represented by the money you spend on that kind of item. Budgeting isn’t so much a collection of guidelines as it is the result of discipline. This is also a situation where you can also decide if you need to budget at all. If you consistently under-spend, without having to manage and watch what you spend money on, then the answer is no. You don’t NEED to budget with that lifestyle and that amount of income. Alternatively if you do decide you need/want to budget, an effective budget under-spends by a margin equal to or greater than 10%.
