Budget 101: Commonly Asked Questions
What is a budget?
A budget is simply a plan for spending your money each month. Based off your monthly income, you divide your money into categories determining where you plan to spend your money each month.
A budget should include any and every thing you put money towards. It should be a plan for all your money—meaning your budget accounts for every dollar in your paycheck.
It’s simple math:
Total Earned - Total Spent = Zero
How do I start?
Start by looking at the previous 3 months of spending. (You should be able to access this online or in your monthly statements you receive in the mail.)
Example Questions to Ask Yourself:
What bills did you pay?
What are your minimum loan payments?
How much money did you spend on food?
Where is your money going?
Once you have an idea of what you’ve spent you can know where to you’re going.
Next look at how much money you’re taking in. This includes your income after taxes and any additional money you make on a regular basis. (If you make an irregular salary—i.e. your income is based on tips—keep reading, we’ll get to how to do that!)
Sort all of your spending into categories. Decide how you will determine what is your non-discretionary and what is discretionary. Then begin allocating a spending limit for each category. Start with the non-discretionary spending first. Then follow with savings. Then follow with discretionary.
Write it all down. You can use this simple budget template I’ve made below.
My income varies from paycheck to paycheck, how do I budget?
In a nut shell, take your average monthly income from the last 6 months and plan from there. Any income that is over your budgeted number can be put away for down months so you can ensure all non-negotiable expenses will always be paid.
We’ll talk about this in another blog soon, but one way to think about your budget is to spend “old money.” With the “old money” mindset, the goal is to spend the money you earned last month during this month. This technique is just one option, but the purpose is to even out your budget and helps compensate for lower months.
What’s the difference between non-discretionary & discretionary spending?
Discretionary & Non-Discretionary spending is often a tripping hazard when it comes to building your budget, but it doesn’t have to be. It is basically fancy terms to identify what you have to pay each month & what you choose to spend money on each month.
Non-discretionary spending consists of the things you absolutely have to pay. It does vary depending on your situation, but a good place to start is probably your housing, bills that come every month, minimum loan payments, cell phone payment plans, etc.
All other spending can be considered discretionary: money spent only if you decide to spend it. Options are: food, entertainment, gifts, travel, clothes, transportation, medical, etc.
The tripping hazard is when people cannot differentiate between a non-discretionary item and a need.
If you’re asking, “Why is cell phone in the non-discretionary category and food is in the discretionary category,” that’s a good question! Think about it this way, your cell phone bill doesn’t fluctuate in price. It’s a set amount that you have to pay or else a bill collector will come for you. On the other hand, each week you make decisions about how much you’re willing to spend on food. You are free to choose how much you spend by deciding if you eat at home or go out and what you purchase. Because the cost varies and is determined by you—it’s discretionary.
What percentage of my income should I spend on _____________?
You definitely can follow the 50/30/20 rule, meaning 50% goes to Non-discretionary spending, 30% goes to discretionary spending, and 20% goes to Savings/Investment. But if you are a person who gives 10% of their income to a church or non-profit—then this system is already busted.
That being said, rules like this work because they gives you a blueprint—a direction to head. That’s truly the key to finances is to have a plan and to stick with it.
But making your money work for you? That’s what makes it intentional finances. So when you’re thinking about percentages, the key is to look what you’re spending now, and then ask yourself, where do I want my money to go? What are my financial priorities right now? Where can I tighten up my spending? Are the companies I’m “bought into” with my non-discretionary funds, companies I support? Does my spending align with my money goals, my future goals, and my beliefs? If not, what do I need to change?
You may realize that your Non-Discretionary spending is 90%—meaning you only have a say on how you spend 10% of your paycheck! That is the point where you can begin to identify wants & needs, to cancel subscriptions, look for lower service providers, etc.
How do I stick with a budget?
Like with anything we intend to cultivate, sticking with a budget is a habit we form over time. Determining what your “trip ups” are will help you determine what money routine will work best for you. There’s definitely tools you can use to help remind you.
Check your account balance every morning before you check your phone. That seems a little ridiculous, but it is important to remember what you’re working with before you get inundated with ads and comparison and the world.
Download an app. I personally use GoodBudget (because it was free) and it really works for us! There are so many app options out there to help you keep track of your spending. If the idea of keeping up with one more app makes you want to cry, you can always keep a small notepad in your wallet and write down every single dime you spend.
Use cash. Dave Ramsey made the Envelope System famous. The concept is that each month, you cash out your pay check and divide your cash into different envelopes. Then, when it is time to go to the store, you take the cash with you, and you can only spend what you got. This works really well for people who overspend regularly or like to learn visually (because you can actually, tangibly see your money.) A downfall, of course, is that so many bills are paid electronically now. So you’ll need pull cash out once you determine how much money needs to stay in your bank account for automatic bill pay.
Pause using your credit card (for now.) I absolutely love credit cards and their many rewards—but using a credit card is only beneficial when you’re using it in a responsible way! If you are finding that each month you cannot pay off what is on your card, stop using it. It doesn’t mean you can’t pick it back up again, but for now, if it is leading to your overspending. PAUSE THAT ISH.
What’s the best model for my budget?
There are a lot of different models and templates out there. Heck, I even added one on this page too. Spend some time thinking about how you operate best. Is having your budget available on several devices important to you? Do you prefer electronically tracking or pen and paper better?
You can definitely research options that are out there, and try one or two out at the same time to see which you prefer best. Don’t get too caught up on what template you’re using and what color coded pens you are using to highlight. It doesn’t have to be perfect or beautiful—it simply needs to tell you what you allocated to spend, how much you’ve spent, and how much you’ve got left. Sometimes we get too invested in whether it is the best model because we are actually putting off the difficult money decision making.
How much of my paycheck should I be saving?
Many experts agree that 10% is a safe number. The only wrong answer is: nothing.
Why’s that? A savings account has 2 functions: to have accessible money when emergencies happen and to have money for the future. No matter who you are, financial freedom comes from being prepared for the unexpected and to be able to afford future expenses without taking loans, etc. Other than non-discretionary spending, putting money away in savings is the most important part of your budget.
That being said, saving money can also be a hang up for people because it is hard to prioritize the future when the now is also expensive. So how do you decide upon a percentage for saving that works for you?
1. Having money set aside specifically for an emergency is the number one way to have your money work for you. Simply put, it keeps you out of financial trouble. Almost everyone agrees that you need 3 months of living expenses kept aside for an emergency (think losing your job, health issues preventing your from work, etc) It is important to note that these “living expenses” are considered the basic needs. In a real emergency, you need to be able to pay your rent/mortgage, but other items like your daily coffee, stichfix membership, etc are cut. So, figure out your “Emergency Savings” number, then ask what your timeline is for reaching that number? The sooner, the better in most cases—but your next step is to then set aside that amount of money each month until you reach your goal. Then, you leave it alone.
2. Helps you save for future goals. I find saving for this category is way more fun. This may be for a downpayment on a house or for additional education or starting a future family or business. When you’re turning a dream into a reality, this is where you pull money from. That means it is more fluid and you can spend at your discretion, but the same is true with emergency savings, if you’re not adding to this account monthly, the money won’t be there when you need it.
When it comes to savings, it is important to train your mind that the money is untouchable. Having clear perimeters for when and how you are able to spend the money is important.
