Tuesday, January 24, 2017

On Budget

I've never really been one for New Years' Resolutions -- if a change is needed, it should be made immediately and not because of something as arbitrary as the date. If the calendar is the only reason for a change, the odds are stacked against it becoming permanent.

There are however some things that the new year is particularly suited for, and one of those is reviewing and updating household budgets. Tax preparation shows you exactly what your income was as of December 3, and many other financial changes take place on January 1. With this information fresh in hand, it's prime time to do some very mundane prepping.

If you've never made a budget before, this can look like a very daunting task. If you've tried before, but always blown the budget, it can feel like stepping up to failure again. Like all other skills, it takes practice to become a proficient budgeter, and you'll very likely have problems your first few tries. Even with my several years of practice and an experienced banker for a wife, this year's budget has had multiple rewrites as we shift priorities and goals. Luckily, budgeting can be made fairly simple if you approach it in steps.

Know Your Income
Start by figuring out your take-home pay. This is pretty easy if you get paid the same amount on every check; if your pay is variable, you'll have to work out an average for each pay period. Your W2 tax form will simplify the math, or you can average out a series of pay stubs. Make sure to use your "net pay" for this, not your "gross pay." Also, never bank on overtime or bonuses for your budget --those things can go away far too easily to depend upon them.

Figure out what you bring home in a month, and write this number at the top of a sheet of paper.

Subtract Your Regular Bills
Once you have your monthly income, list  your regular bills below it. These include rent/mortgage, insurance, car payments, credit cards, and any other regularly paid bills. Total these up, and subtract them from your take home pay. Write down the remainder below your monthly bills.

Budget Discretionary Income
This is where the work starts. After your regular bills, you still need to eat, your car needs gas, and you need to buy clothes and other supplies, and at some point, you'll also want to have entertainment or support a hobby or put back fresh supplies. All of these come from your discretionary money. When you're just getting started with a budget, knowing what you pay for food, gas, and the various other sundries of life is a bit tough. Many banks have a tool on their website that can help with this, by breaking your historical spending into categories and showing trends.

Discretionary income is also where a lot of budget tweaking and rewriting come in, and where budget goals get applied. The big budget goal in our home right now is getting out of debt. We're using a less-aggressive version of Dave Ramsey's "debt snowball" plan (whether you agree with anything else about the man, the snowball is pretty much common sense), so a large chunk of our surplus is being dedicated to paying down debts. The smallest debt gets paid first, then all of that payment gets rolled to the next debt, and so on. I hate owing people money, so we're trying to get away from that.

I've also said before that I'm a big proponent of savings. We have an emergency fund in place, so our saving has slowed down a bit in favor of hitting the debt, but even at this lower rate savings remain a line item on our budget. As I mentioned in the linked post, your specific savings will be personal, and based on your situation; for us, it's in the ballpark of 2 months' worth of house payments. At that level, we don't have to panic if I get laid off or a sudden financial hit occurs.

As you break your disposable income down into categories in your budget, be flexible. Some months will have a higher costs in areas than other months. We always try and budget a little high, just in case we encounter an unexpected spike.

Live With It
Now that you have a budget, here comes the hard part: trying to live within it. You'll likely find yourself reviewing your budget often in the first couple months, trying to make everything balance. This is normal, and is the way to make a budget truly work in the long term.

A little discipline and a little planning will make your life much smoother.


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