Budgeting - The Foundation of Personal Finance

Creating a monthly budget is no easy task. It’s easy to put off a difficult task when you have other responsibilities on your mind, such as preparing for finals, driving your kids to school, or even when you’re about to fall asleep while reading a bedtime story. In today’s blog post, we are going to share some helpful tips for creating an effective budget that prevents overspending and helps you understand where your money goes.

Understanding your Total Take-Home Pay:

To create a good budget, the first thing you need to know is how much money you have available on a month-to-month basis. To do this, you need to determine your monthly net pay. Net pay is your total paycheck minus taxes and any other payroll deductions (such as health care and retirement savings). To get your net pay, combine all of the paychecks you receive in a single month (most will have the payroll deductions taken out when you receive them). If your paycheck(s) comes from a freelance job that doesn’t involve an employer automatically deducting taxes from your income, make sure to set aside this money in your budget. 

Once you know how much money you have each month, you can start looking at how it’s being allocated.

Fixed Expenses:

The easiest expenses to identify are fixed expenses. Fixed expenses include any necessary bill or expense that you must pay for on a regular basis, such as a car payment. Other examples include health insurance, rent, internet, and utilities. While services like Netflix, Stitch Fix, and other entertainment programs charge monthly bills as well, they do not fall into this category because they aren’t necessities.

Some fixed expenses occur at different time intervals. Water bills often come quarterly, or every three months. To allocate for a bill such as this one, you need to divide the amount by 3 to determine how much to allocate for that expense in your monthly budget. 

Items such as groceries, personal care, and child care also count as fixed expenses, despite their variation each month. To determine how much money to allocate for these expenses, we recommend finding the average of these expenses over the past 3-6 months, which will help you gauge how much they typically cost. 

Fixed expenses generally account for 50% of your budget and should cover all of your needs.

Goal Setting:

The last category of your budget should be allocated for saving, typically with a specific larger expense or goal in mind. There are two types of savings goals, short-term and long-term. Short-term savings goals involve saving expenses over the course of a few months or years to finance something like a new car or paying off student loans. Long-term savings goals, which usually require at least five years’ worth of savings, are meant to cover things like saving for retirement, paying for your kids’ education, or buying a home.

Ideally, 20% of your budget is allocated toward this category.

Discretionary Spending:

Discretionary spending is spending on non-necessities, which happens after all of your fixed expenses are covered. This category includes fun activities like dining out, children’s extracurricular activities, or buying a ticket for an event, like Under Review (shameless plug). Allocating money each month for this category can be more difficult because it varies greatly. However, similarly to what you did for groceries, you can take the average of your discretionary spending over the past three months to find how much money you should reserve for this category.

Usually, 30% of a monthly budget is allocated for discretionary spending.

Budgets are Personal:

What we just described to you is the 50/30/20 framework. Of course, it’s important to note that these numbers are only an approximation—because your family has its own unique lifestyle and needs, your budget will reflect this. To start creating your own monthly budget, we invite you to download and fill out the spreadsheet below.

Here is the spreadsheet that you can use to fill out and create your own budget. To edit the spreadsheet click “File” in the top left corner, then select “make a copy”. A copy of the spreadsheet that you can edit will appear on your Google Drive. If you prefer using excel, you can select “Download as” and download it for excel if you prefer that.