“Budget” is a word that takes on a radically different meaning depending on who you talk to. To some people, it is ranked among words like “dentist” and “surgery” and is likely to be followed by a shameful ellipsis. To others, it’s more like “ice cream” and “freedom” and is certainly accompanied by a proud exclamation point.
How is it that one word, referring to the exact same thing, can be interpreted so differently? The answer is context.
The first person described above, Mr. Ellipsis, is likely someone who is not in great financial shape. Mr. Ellipsis has likely waited until reaching a disastrous state of financial affairs to create a budget that he hopes will rescue him from his status quo. While he will likely correct his course with time, the word “budget” will be used as a barrier to his enjoyment of life many times along the way. “I can’t go out tonight, I have a budget...”
Contrarily, Ms. Exclamation took a different approach. She got her first job after graduating and—before making any substantial financial decisions—took less than an hour out of an afternoon to put all of her monthly expenses on paper, both those that were known and those in the future. She knew she didn’t have to do anything over-the-top (no spreadsheets needed, unless of course that’s your thing), but rather just enough to have a plan for where she would send her money and how much wiggle room she had each month. As a result, the only time she had to think about her budget was when her friends asked, “How could you afford that?” To which she could proudly reply, “I have a budget!”
The 15 Minute Minimal Budget
Step 1. Figure out how much you make
Let’s assume an income of $34,285 per year. If you’re wondering why it’s such a specific number, it’s because I’m also assuming 30% for taxes, retirement, and insurance which gives us almost exactly $24,000 take-home pay, or $2,000 per month. That’s the number we’ll put on our budget.
Step 2. Figure out how much you NEED to spend
“Need” is really the keyword here, this typically boils down to rent, utilities, food, and existing debt payments. That’s it.
Income: $2,000 Rent: - $650 Electricity: - $60 Gas: - $50 Groceries: - $150 Eating Out: - $200 Student Loan: - $250 -------------------- TOTAL: $540
These numbers don’t have to be exact, but they should be honest. Utilities and food spending will fluctuate month-to-month, but as long as you’re close you’ll have a good idea of what you can and can’t afford. When in doubt, round up.
Step 3. Figure out how much you WANT to spend
This is where you put everything beyond the bare essentials. Cell phone plans, gas, subscriptions, you name it, it goes here.
Remember, $540 is your baseline leftover from Step 2, which is a significant portion of your take-home pay (27%!). If you’re in debt or are rapidly accelerating toward being in debt (especially high interest debt such as credit card debt), you should very carefully consider what expenses you list during this step. Every dollar you don’t spend on unnecessary luxuries is a dollar you could put toward paying down that debt, should you choose to do so.
Income: $2,000 Rent: - $650 Electricity: - $60 Gas (home): - $50 Groceries: - $150 Eating Out: - $200 Student Loan: - $250 Cell Service: - $60 Internet: - $50 Gas (car): - $100 Netflix: - $13 Cloud Storage: - $3 Newspaper: - $14 -------------------- TOTAL: $300
Step 4. Decide what to do with what’s left over
This part is entirely up to you. I’m not going to tell you what you should do with this leftover money since there are plenty of successful finance gurus that all have an opinion on this.
The only thing you should take away is that this number is why having a budget is so important. Knowing you have an extra $300 at the end of each month is the critical first step to being able to make confident spending decisions at each and every juncture. Using just 15 minutes of your life to put this all on paper is the difference between knowing and guessing, and it makes all of the difference in the world.
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