Budgeting

Action: Read below and follow the Take Action steps at the end of the section.

A general rule to creating a budget is as follows. Each month your household take-home pay should be divided amongst:

• Essential Spending (housing, food, transportation, child care, etc.): 50%
• Essential Saving (retirement/IRA): 15% (your employer may contribute and help you reach this goal)
• Short-term Saving (like an emergency fund): 5%

The other 30% is your discretionary income to use as you see fit. This may be an unlikely goal for you at this point but treat it as a general guideline as you walk through these next steps.

There are several ways to learn about your spending and how to create a budget. If you spend mainly with checks, credit cards, or debit cards, you can look at your past few monthly statements. But even then, you most likely pay for some items with cash. For these, you should start keeping a money diary. Every time you shop, write down exactly what you buy and how much you pay. Always make sure you get receipts, as these will make the job of tracking your spending much easier. You can also try using a budgeting website or app – many are available for free in either form.
When you have tried this for a month or two, add up what you spend on food, housing, clothing, and other items (housing includes rent and utilities such as electricity, water, cable, etc.). Then break down those categories even more. In the food category, for example, look at what you spend on staples for your weekly meals—like milk, eggs, bread, fruits, and vegetables—and what you might spend on “fun” but not entirely necessary items such as ice cream, soda, or wine.

Once you have your spending data in hand, it’s time to set priorities and look for ways to save. Cutting out junk food is one healthy possibility. Quitting bad habits such as smoking is another (click here if you need support in quitting). In big categories like housing, you may want to ask yourself if there are any ways to cut your housing costs and still feel comfortable and safe. Ask yourself if you can get by without cable TV (you can always borrow movies from the library), or if you can negotiate a better deal for your TV or Internet service.

When looking at your basic needs, add up what you must spend each month—and no more. It should be well below your monthly income. If not, try to go back and trim some more. Once you’ve done that, you may be able to add back some spending for fun, gifts, meals out and so on.

If you can keep your spending total to 10% below your income, you’re doing great. At that rate, you would have a full month of your income saved in less than a year. But don’t be discouraged if you can’t save that much. Saving anything—and making sure to do it each month—is still worthwhile. It is important to get into the habit of saving, and over time you will prioritize paying yourself first.

Take Action:

1. Check out this video: Creating a spending plan-Fundamentals.

2. Use this Budgeting tool to help you get started.