Recently, I have been thinking more about budgets and budgeting, as I have been helping a friend with setting up a budget.
I haven't always budgeted. I had always been very careful with my spending, but I never actually allocated $X towards this and $Y towards that. I became interested in budgeting only after I read several budgeting related articles in magazines. They had enticing titles, such as: "How We Saved $50,000 in One Year", or "Paid off $80,000 Debt", or "Slashed Grocery Bills in Half", etc. I was intrigued and wanted to see how I compared.
At the time, I had a fairly good idea of how much I spent on various things, but didn't know for sure. I knew what I paid each month on mortgage and on childcare, for example, but how much did I really spend on groceries and eating out? Or gas for the car? Or clothing for myself?
So, I kept a spending log for 3 months, recording each and every penny spent. Next, I went through my check book for those once or twice a year type of expenses and figured out a monthly amount for those expenses. Then, I came up with a very preliminary budget, based on what my spending had indicated.
I decided I would base my budget on my net, or "take home" pay, after deductions for taxes, etc. that were deducted directly from my paycheck. Mainly because this is the actual disposable income I had and it made it easier for me to not to keep track of the direct deductions. Based on my spending habits as indicated by my spending logs, I decided that I would save 30% of my net income and live on 70%.
For me, as a single parent and sole income earner, having a sizeable savings account/emergency fund was important. At the time, in the early 90s, people were encouraged to have at least 3 months worth of living expenses in an emergency fund, but single parents were urged to have 6 months worth of living expenses saved. Later, when the recession hit, a 3-6 months worth of living expenses savings were found to be insufficient as people found it harder to find another job; it took a longer time to find a job, or they had to settle for lower paying jobs. We were urged to have one year's worth of living expenses saved.
I think I initially had about 10 or 15 categories in my budget, and they were very broad and general: House, Utilities, Car, Daughter, Groceries, etc. But then, I discovered my inner accountant! LOL. My categories were too broad for my liking! I wanted more details! So I broke down the bigger categories into sub-categories. For example, under House, I had mortgage, insurance, property taxes, maintenance, garden; under Car, I had insurance, maintenance, gas, etc. This level of detail has actually worked out quite well for me.
Over the years, I have adjusted my budget and categories as needed, such as during the recession, when I had to accommodate a 25% pay cut! I revised my budget, cutting back where I could, including decreasing the amount going into savings.
Cutting back on a budget that is fairly lean to begin with is an interesting exercise! One can't eliminate the cable bill, for example, when one doesn't have a cable bill to begin with. No eliminating buying lunch/coffee/muffins/soda, etc., daily, when one doesn't buy lunch or any of the other items (both daughter and I took our lunches and snacks to school and work). No stretching out the times between visits to the hair salon for cuts and coloring when one didn't cut ones hair or color it. So where does one cut back? I reduced the Christmas/holiday gifts budget from $25/month (or $300/year) to $10/month (or $120/year). I decreased the grocery and eating out budgets, my clothing allowance, household supplies and gardening budget, eliminated the books and crafts supplies budget, and made many such tiny adjustments where I could.
I even worked out what I called a "bare bones/no frills" budget, in case of layoffs at my work place and I had to live on savings or on a minimum wage job. I discovered that even with a bare bones budget, I'd still need to work two full-time jobs at minimum wage to make ends meet, as I still had a mortgage to pay.
Then, daughter went to university (undergrad) and we had her tuition and fees to pay and expensive text books to buy (even second hand, they amounted to several hundred dollars each quarter). I revised my budget, again; this time, I was living on practically 100% of my net pay and very little, if anything, was being saved. But that was OK. I was determined she wouldn't have to take out a student loan. We cut costs where we could. Daughter lived and commuted from home in order to save $15,000 a year on the room and board she'd have had to pay if she lived on campus. I stopped giving her an allowance and money for clothes. She worked part time at 3 jobs in order to earn some spending money.
When she went to grad-school, however, and needed to live away from home, I had a budget shortfall and had to withdraw from savings to pay for her tuition and rent. And, again, it was OK. I had just finished paying off my mortgage, so I had that amount available towards her tuition. Plus, I had been frugal and saved for this purpose. Again, she worked part time to pay for her groceries, utilities, and other items she needed, and I helped her set up her first budget. Once daughter graduated and started working full time, she assumed paying for her rent and most of her other expenses (I still have her on my cell phone plan and pay her share of the bill and I pay for her tickets when she flies down to visit me). Her rent is going up in July when the new lease starts, and she doesn't have a corresponding increase in her pay, so she's needing to review her budget and make adjustments where she can.
This past year, since I no longer had to pay for daughter's tuition and rent, etc., I have been saving a larger percentage of my pay check. I'm in what I call savings replenishment mode! But I will be taking another look at the budget in June. It maybe time to bump up a few spending categories, again, to pre-recession levels!
How do you budget? How do you decide how much to save, how much to spend, etc.? Do you save off the top, before spending, and then, budget with what you have or do you save what is left after spending?