In the last blog, we covered a sample of 7 essential areas to prioritize.
Looking over the essentials you’ve outlined by category, the next step is to build them into a budget or Plan to Spend. The purpose of a budget is to tell your money what the priorities are versus wondering what your money was spent on after the fact.
Now I know I put a lot of focus on the defense side of the equation in ensuring that you have a system and process for managing your money. This is due to the ability to have a solid footing or foundation to work up from. You and I probably know far too many people who make a great income but have nothing to show for it.
So not only is a budget in and of itself essential, but it’s also essential to look at the specific categories and budget based on what matters most to you.
Whether you use a product like YNAB, EveryDollar, or Personal Capital to track your budget or a Google Sheet, the more important thing is that you are making it a priority.
So within your budget, look at establishing categories.
In an article by EveryDollar, they were outlined into 11 categories;
Step 1: Insert net pay to your bank in Income. This is all income sources, whether it be a W2, 1099, side hustle, seasonal, or other streams of income in the form of more passive income like a retirement stipend, social security, or an income property.
Step 2: Insert Giving as 10% of the first figure. I always like to encourage people to prioritize giving, whether that be to a cause or mission, a ministry, or a family in need.
Step 3: Insert Saving as 10% of the first figure. Intentionally putting money toward a savings goal should be a priority as you build a basic $500, $1,000, and then $2,500 rainy day fund leading up to 6-months of your living expenses.
Step 4: Insert mortgage (if a mortgage exists) or rent as 25% of the first figure under Housing. Now housing is widely controversial in the percentage of income and gross vs. net take-home pay that you would spend in order to get into a home. Finding the figure that makes sense for you based on the lifestyle you want to live will help define this.
Step 5: Insert Utilities as 5% of the first figure under Housing. Utilities can vary widely based on the efficiency of your home and appliances and how much time you spend there.
Step 6: Insert transportation costs as 10% of the first figure. With the average monthly payment on a new car pushing $600, the increasing cost of fuel, and other means of transportation, this figure can be difficult to set and forget. Still, at least setting the priority you place on your transportation will help you know how much to assign to this area.
Step 7: Insert food costs as 10% of the first figure. This is a baseline percentage to be aware of, but look at what is essential for your diet, lifestyle, and social agenda. Making sure to budget properly in this area will be important as too many people do not set out a plan around their food costs.
Step 8: Insert personal expenses as 5% of the first figure. It’s important to have a category for your personal expenses, haircuts, and subscriptions. This way, those semi-regular expenses have a place to be seen as a category so that you can make adjustments based on whether you want to place that amount of spending in that specific area.
Step 9: Insert miscellaneous expenses as 5% of the first figure. Having a miscellaneous category for Amazon purchases or runs to the local pharmacy ensures that those expenses don’t artificially increase your food expenses. Often, these miscellaneous expenses can occur when you are doing a Target or Walmart run.
Step 10: Insert recreation expenses as 5% of the first figure. This category covers date nights, going to the movies, golfing, or a concert. It is making sure to make room for those irregular expenses that feed your lifestyle.
Step 11: Insert insurance expenses as 15% of the first figure. Insurance can be a massive expense between the needs for health insurance, life insurance, and disability, amongst many others. Giving yourself a figure as a starting point will help you determine what you spend in this area and if anything needs to be adjusted.
Now, these categories add up to 100%, which prevents you from living above your means but also builds in forced savings and no slush fund.
Once you have looked at these 11 steps to developing a budget and immediately factored in your specific essentials in each category, you’ll then be able to see what are the categories that you place the greatest focus or importance on. This will ensure that the money that flows through your hands goes to the most important areas.
CTA:
My call to action is to take the time to go through the budgeting process, first off the recommended percentages, then the percentages based on the categories that matter most to you. This will set you up to align your budget, and your personal finances, with what is essential to you.
