I’ve been asked by a lot of young professionals to do some articles on finances and budgeting. I’m not a financial expert, but I’m not broke, so I guess that should give me some expertise. When in doubt, consult your own financial advisor, tax specialist, or someone you trust to answer questions about your own personal financial situation.
I run my family’s budget based on percentages as it is the easiest way to A) Stay on or under budget and B) Stay disciplined financially.
The following budget percentages are based after tax. Before tax, simply multiply your annual gross salary by your tax rate (and any deductions like child support, automatic investments, etc) and then divide by 12 to get your monthly after tax income.
Below is what a basic percentage based budget looks like. Some people prefer to budget by actual amounts, but percentage based budgets go on the logic that, for example, paying for a car should not take 50% of one’s income.
This is my percentage based budget. Tweak yours so that it fits within your reason and personal needs. Some people might not even own a car, so maybe they can spend more on food or health insurance or savings. Some people might make a lot of money that they just need half of their salary to pay for all their basic budgeting needs. Use this as a guide for creating your own balanced budget.
29 % Housing
(includes homeowner’s fees such as homeowner’s association, rental or property insurance, property taxes, repairs and maintenance)
I used to work as a real estate agent, or Realtor® as some in the industry prefer to call it. When I helped customers determine their budget – whether buying or renting – I made sure their housing costs stayed under this percentage. Why? Well, mortgage companies determine what they call a “housing expense ratio” by dividing the mortgage/housing costs by the borrower’s salary. This ratio determines whether or not the borrower will be able to easily pay for their loan. If this number is greater than the industry standard of 28 or 29%, then the borrower is at a higher risk of default, meaning higher risk for the lender and lower the chances of them getting their money back. If, by some miracle, you get a loan or rental, expect abnormally high late fees or deposit requirement or interest rate.
This also goes for renters. As a landlord, the number one thing I check (besides credit and criminal record) is a potential renter’s housing expense ratio. If they do not fall under the 29%, then I simply cannot approve them for rental. I’m taking the big risk of eviction costs and other fees including mortgage payments if they don’t pay on time or at all. Just be honest with yourself and rent or buy within your means.
Friends and former customers were shocked by this ratio; some never even knowing it existed. It makes shopping for an apartment or home more difficult, but realistically within financial range. I hear groans at the beginning, but later sighs of relief that they’re not struggling to make rent when times get tough.
[box type=”info”] SIDE NOTE: In France, use of this ratio is even more strictly applied. Landlords check bank statements, saving’s statements, tax and salary statements for at least two years and sometimes even have parents of adult children co-sign or attach their own banking accounts in the event their children (sometimes well into their 30s with great jobs) do not pay. Evictions can take up to a year in France and because of this law, landlords rather be safe than sorry. [/box]
I place food at second because what you put in your body is just as important as to what you put over your body to shelter it. This means buying quality food, avoiding over consumption of fast food, and eating fresh should be a priority – whether or not you dine out or stay in.
Obviously, staying in to eat wholesome food costs less, but I know some people who prefer to eat out. Sometimes, way too much. I remember a woman spend nearly $2000 per month on dining out. I asked her why she spent so much on just herself and husband and she said it was because her kitchen wasn’t finished. That’s $24,000 a year on dining out. Spending a quarter of that would have finished her kitchen in less than a month. See the logic?
We have excuses for either spending way too much on our food budget or not enough. It’s no wonder why people are often sick, malnourished, or tired because they’re not caring for their bodies with good nutrition.
To get this actual dollar amount, multiply your after tax salary by 19%. For someone or a couple who makes $2,100 a month, this would be $400 per month at a $100 per week budget.
I studied the cost of my grocery budget for a year using recipes for four people and I averaged that a healthy dinner for the family of four costs $5.00 if made at home with simple ingredients. Breakfast and lunch tend to be cheaper as most of the time we ate fruit, toast, and things like eggs and waffles and then sandwiches, salads, or left overs for lunch.
[box type=”info”] We also have a 2/3s vegetable diet, ultimately cutting down on meat costs. If we do buy meat, we always got it from the deli which cuts down significantly on packaging costs. We also buy at the weekly farmer’s market, spending €30-40 per week on organic vegetables. The highest price being splurging on expensive fruits.[/box]
Utilities typically includes phone and internet bills, water and sewer, trash and recycle fees, and electricity. We spend, on average, 6% but we keep an extra two percent if I can’t handle keeping the heat below 68 during winter. The great thing about utilities bills is that we have the power to significantly reduce them by small changes in habits.
To break down these figures, simply multiply your net monthly salary by .08. This should give you, if you make $2,100 per month $168 per month available for your utilities. Then, subtract the monthly average bill of each utility by priority such as water and sewer first, then electricity, then phone, etc. This will determine how much you really have left for your phone or internet plan and if your family needs to cut down on water and electricity consumption.
[box type=”info”] The great thing about the utilities section is that we can control our monthly bills by our own choice to moderate our consumption. Take shorter showers, shut off all electricity while you’re away from home, choose a basic cell phone or internet package. These are all ways of consuming less utilities saving more money on the long term.[/box]
This includes car payment, insurance, gas, maintenance (oil changes, tire changes, replacement parts, etc), tolls, bus or metro tickets, etc. I bet some of my American friends are freaking out saying, “What! I spent $500 a month on maintaining my car alone!” If you make $5,000 per month, then that’s a reasonable expenditure, but if you’re earning $2,000 then you’ve got a problem and need a priority check.
Obviously, families in car dependent cities need a vehicle, but do we really need tricked out expensive SUVs or sports cars when we can really live with a smaller, quality car we can pay off in a year or save up and buy with cash? Can we save money and have just one family car like they did in the good old days? Can I walk, ride a bike, or carpool with a friend?
To figure this sum, multiply your net monthly income by 10%. Gather your transportation bills from the previous year to make an estimate of your monthly average costs. For someone who makes $2,100 per month, their monthly transportation budget is $210. That means car payment, insurance, gas, and maintenance are all included in this sum.
Begin by averaging the highest price of gasoline and multiply the weekly sum it takes to fill up the tank. For example, a full tank of gas each week with the average 16 gallons at the current U.S. gasoline national average $3.68 a gallon is $235 per month. That’s well above the monthly budget. This startling figure goes to show that owning a car at the average rate of $199 per month, plus gas, but maintenance fees is not possible with this budget. The person with this budget must decide to choose a few or all of the following: A) pay for a car with cash in order to avoid a monthly payment and interest B) purchase a low consumption vehicle C) sacrifice insurance coverages D) use public transportation or share rides.
[box type=”info”] When I was in high school and college, I saved up and paid cash for my cars. We went from having two large SUVs to having nothing but a scooter after a year of hoofing it in France. From our experience, having no car cuts down on spur of the moment shopping trips, which then lead to impulse shopping. It also cuts down on that “There’s nothing to eat, let’s just get takeout” habit. Planning trips around errands and lumping them together can save on gas and time spent in traffic.[/box]
In this section, I put miscellaneous items like clothes, technology gadgets, home goods, things for the kids, etc. Having this percentage in mind is easy because we can simply say to ourselves, “Ok, I made 3,000 this month and so far, we’ve spent $200 on going out. I’ve spent nearly all of my alloted budget, so I need to either slow down or stop.”
Budgeting shopping money takes out feelings of guilt of the idea that we’ve got to stick to a budget or else we can’t have any fun or get the basic needs for our kids or loved ones. If you’ve got a small miscellaneous budget because you’re a strict minimalist, consider this a “mad money” or vacation account.
To figure this amount, multiply your monthly net salary by 10%. Select the most important items needed for the month, either child care costs, children’s necessities, laundry service, etc. Move from the most important to the unnecessary. Prioritizing helps cut out waste and ensure all necessary family costs are covered.
8-10% Health Care
Health insurance is a tough one, but a necessary expense for families with children or individuals with health issues or those who can’t stand the idea of not being covered in the event of an accident or unexpected malady.
In the U.S., insurance is very expensive. I’ve known families of four that spent $1,000 per month and childless couples that spent $350 per month on insurance alone. At the very least, try to get minimal coverage in the event of a catastrophe or life threatening disease.
[box type=”info”] Don’t forget to budget in co-pays, prescriptions, and other types of health care like glasses or contacts, chiropractic care, and massages. These count as health care expenses and they might even be tax deductible. See your accountant for more details. [/box]
10- 20% savings
This is money that you save each month on your own volition. End of the year income taxes DO NOT count. This money can either go towards a college fund, retirement savings, stock market investing, a portion for emergencies (because bad things happen) or even a baby or big vacation fun.
According to my financial adviser, if you’ve got things like credit card debt or any kind of high interest debt, make it your goal to pay it off before saving or investing. The stress of hanging credit card debt can eat away at people and hurt their credit scores on the long term. The faster you pay it off, the better.
Once credit card debt is eliminated, start working on having a savings fund at least 10% of your annual salary. This is just in case you have an emergency or lose your job. The ideal is 30% to 60% in the event of job loss lasting longer than 3-6 months, so work towards that. Cash in king in a recession society.
Once you have a healthy savings, you can then invest in longer term investments such as 401k’s, stocks and bonds, IRAs and even property. You’ll be happy to see dividends come in and if you absolutely need to, you can cash out in the event of an emergency. Just be aware of taxes and penalties.
[box type=”info”] Try to pay yourself first with savings. If you can take out your savings BEFORE you create your budget, you’ll be way ahead of the game. Or, simply make sure you remove your savings cash and place it into a save account once you’ve received your weekly or monthly paycheck.[/box]
10% Community Investment
When I was growing up, even if we were usually on the struggle, my mom made it a point to donate 10% of our month income to charity without fail. Some call it tithing. Some call it investing in the community.
This can mean giving money to your church so they can in turn feed the hungry or help families in need. This can mean buying a friend groceries after they just lost their job. Donate your gently used clothing and home goods to your neighborhood clothes closet.
If you are really on the struggle, then make it a point to donate your advice or time. Help someone by watching their kids, visit a friend’s sick mother in the hospital, volunteer with your favorite organization. Do what it takes to send love and goodwill out into the community to inspire others to do the same.
However you choose to give a part of your income, trust that good karma will come back to help you when it’s your turn to experience a tough moment in life.
So there you have my budget. Your budget may or may not fluctuate each month. You may make a lot more than is necessary for this percentage-based budget. However this can be a good starting point to creating a balanced budget and secure financial life.
I’m not going to say that it’s easy to stick to the budget, but it’s easier than dealing with late fees or freaking out because there isn’t enough zeros in the bank accounts. Creating a budget forces us to ask us what is our currently financial reality, our current basic needs, our bad habits that keep us from financial security. In fact, having a realistic view of our current income and basic needs can inspire one to earn more or choose a profession with more financial security OR spend less, creating a happier life with less.
Financial security is our own responsibility and it’s up to us to create strong habits and develop self discipline to ensure that we can have our basic needs met and start building a life we really want to live.
Do you budget your family’s finances? How do you go about budgeting your income? Share your experiences here!