Making a Budget
You can start your budget simply by identifying spending categories and listing all the money, either estimated or exact, that you spend in each category each month. Try to include everything you spend money on, right down to toothpaste and Juicy Fruit. Take a look at this to see just where your money goes. Feel free to revise it to best suit your needs.
Show Me the Money
Routine expenses in-clude the more obvious expenditures, such as rent, insurance, food, and entertainment. Non-routine expenses are expenditures that people often overlook because they don't have to pay them regularly. They include car repairs or medical expenses.
Although certain things, such as your rent, groceries, and clothes, will be obvious expenditures as you start preparing your budget, make sure you include a category of less-obvious expenses. Things such as Christmas or Hanukkah gifts, the birthday party you want to give your boyfriend in May, the $100 you contributed to the Red Cross to aid hurricane disaster victims, and wedding and baby gifts, are all known as nonroutine expenses. They aren't exactly unexpected—I mean, Christmas and Hanukkah do roll around every year—but they're not expenditures that come up each month, so you're more apt to overlook them.
Car repairs also are nonroutine expenses. If you don't budget for them, they can be devastating financial news. It's hard to anticipate when your muffler is going to drop off onto the highway, but you must have some money budgeted for a new one when it does.
Or what if you've budgeted money for routine checkups with the dentist, but learn during one of those checkups that you have a loose filling in your back tooth that needs to be taken out and replaced? A little procedure like that could set you back more than $100 and wreck your monthly budget.
The way to anticipate nonroutine expenses is to figure out all that you've had in the past year. Include car repair bills, big gifts, unexpected medical bills, the weekend at the ski resort that came up unexpectedly, and any others you can think of. Add up the cost of all those things, and then divide the total by 12. That's how much you should set aside each month for nonroutine expenses.
If you're just out of college and starting out, estimating your nonroutine expenses will be difficult because you probably won't have much of a history of these types of expenses to work from. If that's the case, ask someone to help you. Maybe you have a friend who's been on his own for a few years and can give you an idea about these types of expenses. Or perhaps a family member can advise you on car repairs and other expenses.
The first items to list are known as routine expenses. You'll need to have the following in your budget:
- Housing. Your rent or mortgage will make up the biggest chunk of your housing expenses, but don't forget the other things that you pay for, too. How about your phone bill, your utilities bill, and the sofa and loveseat you bought? Consider the set of dishes you got at Ikea, and the washer and dryer. How about your cable bill? If you're paying costs for upkeep, such as having the carpets cleaned, windows washed, or painting done, be sure to include that, too.
Dollars and Cents
When you put together a budget, you can set aside your savings in one of two ways. Either include the money you'll save each month in your routine expenses, or deduct it from your income before you start making your budget. Paying yourself first will pay off greatly down the road.
- Debt. This is probably another big expense category, unless you've been very frugal or very lucky. Include in the debt category everything for which you owe money: your car, your student loans, your credit cards, and so on. Do you have a line of credit opened anywhere? What about personal loans? If your dad loaned you $1,500 for a security deposit and the first month's rent on your apartment, include that in your debt category. Include both principal and interest payments.
- Insurance. Include any insurance you pay for in this category: auto, health (don't forget your co-payment if you're partially insured by your employer), renter's, and so on.
- Taxes. If you don't own property, you probably don't pay many taxes other than sales taxes and those deducted from your paycheck. If you do own property, you'll need to include the local property taxes, even if you put money in escrow and your mortgage company makes the payment for you. Also include the taxes that are deducted from your paycheck: federal, state, social security, occupational privilege, and any others.
- Transportation. If you don't own a car, your expenses in this category will be what you spend on public transportation. If you own a car, include routine maintenance costs (such as oil changes) and what you spend on gas and car insurance. Don't forget those pesky little expenses for your license and car registration. If you pay tolls regularly when driving, include those, too.
- Health care. Hopefully, these costs are minimal. But don't forget to budget for dental costs if your insurance doesn't cover them, eye exams, glasses, prescriptions, and routine doctor visits.
- Entertainment and Vacations. If you're like most people in their 20s and 30s, this category will contain considerable expenses. Make sure you include everything, for this is one of the first areas we'll be looking at in which to cut costs. This category covers a variety of expenses, such as vacations, restaurants (even fast food), and the cost of drinks if you go to bars, clubs, or coffee houses. Think about movies, concerts, museums, cover charges, and any costs associated with hobbies (golf, bowling, skiing, or whatever). Don't forget pet costs, magazines and books, video rentals, the money you spend on DVDs, CDs, DVD and CD players, and any other expenses related to entertainment. Don't forget the money you spend in the office football pool and on the trip to the casino. Be honest when you list expenses in this category. Many people don't realize how much money they spend on entertainment until they sit down and add it all up.
- Personal. This category includes food, clothing, shoes, jewelry, laundry and dry-cleaning costs, your health club fees, all fitness expenses, and money spent on hair stylists, manicures, makeup, and toiletries.
- Children. If you have kids, you already know they're expensive. If you don't have kids, but plan to someday, it doesn't hurt to know what costs are involved. Include expenses incurred for baby-sitters and day care, toys, clothes, food, diapers, and shoes.
- Giving. List money you contribute to your church, synagogue, or charities.
After you've listed your expenses, add them all up. Think about any categories you might have to include that aren't listed here, and don't forget to include the nonroutine expenses we talked about earlier.
More on: Family Finances
Excerpted from The Complete Idiot's Guide to Personal Finance in your 20s and 30s © 2005 by Susan Shelly and Sarah Young Fisher. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
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