How to Budget

“It's time we reduced the federal budget and left the family budget alone.” - Ronald Reagan

If you’re not a federal government and able to print your money then you must learn to spend less than you make. This is called budgeting. It’s important for every day life so you know your daily spending limits. It’s also vital for special events like how much can we afford on a vacation, new car, or new house? The current so-called mortgage crisis was partly caused by people buying more house than they could afford. Other mortgage disasters resulted from people who spent more than they earned by using the home equity of their house as an open loan that never came due while prices climbed upwards. (For a well-written story of a NYT economic reporter with mortgage problems, see www.nytimes.com/2009/05/17/magazine/17foreclosure-t.html?pagewanted=1&_r=2)

It is easy to spend: Starbucks coffee, cell phones, cable TV package, bar drinks, cigarettes, meals eaten out. These things add up quickly. My wife had to point out to me how much money I was spending on breakfast and lunch in NYC every workday. It was never a lot at one time but it added up to a lot in total. Last weekend we visited some craft fairs and farm markets and afterwards were amazed how quickly we had spent the cash taken from an ATM at the start of our travels.

A documented budget and spending plan can also help with lifestyle changes. When my wife wanted to quit her job, we looked at our spending habits and found ways to cut back so we could live on just my income. Years later when I was laid off, we added up our fixed expenses plus some modest discretionary spending to determine the minimum salary I could earn to support our lifestyle. When calculating earnings don’t forget to include taxes and other items that reduce income. There is a huge difference between salary and your take home pay. Suppose for example that state plus federal taxes are 30% of your income, you give 10% to your church and you give 10% to a 401K or other retirement savings. Then there is a 50% reduction in your net earnings and in order to live on $40,000 per year you would have to earn $80,000.

You also have to be realistic when estimating earnings. Don’t spend assuming this year will have a huge bonus equal to last year. Don’t spend assuming you have a high-salary job that will always be there. Don’t spend assuming you can work lots of overtime to make up the difference. Don't spend assuming you can pay it back "someday" with a lottery winning, inheritance, or other windfall event.

Bottom Line
If you’ve never done a budget before, check out the Consumerist's 9-Step Beginner's Budget plan. It provides a getting started spreadsheet and instructions on how to use it.

www.ncnblog.com/2009/05/11/10-things-to-do-before-creating-your-next-budget/ has some advice on starting a budget.

Here’s an online site for creating a budget which claims it “is private and accessible only to you”, www.tomorrowsmoney.org/section.cfm/387/429/877/881

Kiplinger offers the following as traditional spending levels. Actual results may vary but if they differ by a lot then ask yourself why you’re a high spender in some category:

• 30% Housing
• 10% Utilities and other housing expenditures (including renters insurance)
• 15% Food (at-home and away)
• 10% Transportation (including car loan)
• 10% Debt repayment (student loans and credit cards)
• 10% Saving
• 5% Clothing
• 5% Entertainment
• 5% Car insurance and miscellaneous personal expenses

For a detailed history of one hundred years of government programs to encourage "everyone" to own a home (with disastrous results every time) see Obsessive Housing Disorder.