During our blogs, we talk about "sticking with a budget" or "managing your budget" but never actually talked about finding or understanding your budget, until now. To find your budget, you need to break down your "monthly take-home income" into groups or categories. Realistically, most of us probably separate our money into two groups, #1 is monthly bills and #2 is anything leftover, which we tend to spend on whatever we want. Well, let's just say you're almost on the right track.
Your budget should be broken down by percentages. By doing this, you will know how much you can actually afford. On a "monthly take-home income," you should get in the habit of putting no less than 10% of it into some sort of savings. 30% of your income is how much you can afford to pay for rent or 25% for a mortgage. If you drive a car or are thinking of buying a new car, then your car insurance & car payments shouldn't be more than 10%. Nowadays, most of us have debt that needs to be paid off - credit cards, money borrowed from a family member, school, or even an upgraded cell phone payment. No matter how you accumulated this debt, it should all be under 15%. Anything leftover, around 28%-35%, is the true amount of money you have left over.
Let's break down what actually falls into each category:
- Savings Short Term: 10% or more of your monthly take home income should be put aside for short term savings. Short term saving accounts are accounts that won't penalize you for making withdrawals. These type of accounts are regular bank savings account (0.01%-0.06% interest return) CD savings (1.01%-1.10% interest return), there are new developments apps that help teach stock marketing and you can, save money there (4.5-5.0% interest return) or if you're old school and don't trust banks, then underneath your mattress is also a place to save money (0.00% interest return).
- Savings Long Term: 7% or more of your income should be put aside for long term savings like retirement, 401k or IRA. Whether you opt to have it be tax or pre-taxed is total up to you. Next week we'll post "To Tax Or Not To Tax" for you to reference when learning more about saving long term.
- Rent: 30% of your income is recommended for what you should be paying monthly. We also recommend not increasing this percentage whether you have roommates, family member or a significant other living with you. But if you can find a place that is less than your 30% then great because you can put that money somewhere else.
- Mortgage: 25% is 5% less than rent mainly because with owning a house come taxes, fee, house repair, etc. So the 5% difference should be put aside towards your savings for a rainy day fund.
- Insurance & Car: 10% of your income should be used on your car. Now, this might seem to be a tough one to deal with because maybe there is a car that you really want that cost more than your 10%, well there is a phrase I like to say and stick by.... "Stay In Your Financial Lane." Don't buy something that will be eating away a good amount of your money, especially a car. Keep your eye out for our blog "Stay In Your Lane" which we'll post in a few weeks to learn more about owning a car before buying a new car.
- Debt: 15% of income should be used to paying off debt. If you are paying minimum payments on all of your debt and it's more than 15% of your monthly income, then you my friend have a debt problem and should reference our upcoming blog on "Snowballing The Lender."
- Leftover: 28%-33% of your money is actually what you may have left to spend on whatever you like. Concert tickets, clothing, night out, etc. whatever it is. Keep in mind that cable, Hulu, cell phone bills, train metro pass, etc. also fall into this category. But if you have extra money from this category as well, you can use it towards paying down Debt or adding it to your savings.
Once you've established your true budget, most of you may realize that your numbers aren't as perfect as stated above but this is your chance to get in the mindset and work on your budget. Cut back on things, figure out what's important to you and get in the habit of "Sticking With Your Budget." You can download our spreadsheet to find your true budget here. If you want a month to month spreadsheet on managing your budget, just click this link to join our email list and get the chance to download all of our excel sheet.