I’ve alluded to the budgeting process in the last couple of posts without outright saying how to do so. However, one of the topics that was previously suggested by a follower on my personal account was how should budget for certain things each month.
There are a variety of ways one can determine how much to budget – depending on your expenses and situation. Two popular options include the Zero-Based Budget as well as the 50/20/30 Budgeting Guideline.
The Zero-Based Budget
What is zero-based budgeting? To sum it up in a sentence, you break even in terms of income = outflow for bills and savings exactly. If one has consistent income, it makes budgeting far easier than with inconsistent income, but it can work for the latter as well.
With this method, plan out any savings/investing goals first, then fixed bills (i.e. housing, utilities that stay the same monthly, loan payments), variable expenses (fluctuating utilities, groceries, gasoline, etc), then determine if anything is left over. If there is, one could leave it as a buffer for unexpected expenses that arise before the next pay period, or they could allocate it to savings/investing or extra debt payments or set aside some fun money.
For those with inconsistent incomes, I’d recommend reviewing the last several months of income and determining a baseline/bare minimum that you’re bringing in to start your budget with. Use that number to cover fixed and critical variable expenses, then if additional income comes in to exceed that number, then send money to savings/investing, extra debt payments, or to less critical variable expenses.
FYI, it takes a while to perfect a budget, so if you miss on estimates (especially groceries!) the first few months, don’t be discouraged. Tweak as needed until you get it right. We regularly have to tweak ours as life happens – some months we nail a category, other months we miss it.
The 50/30/20 Budgeting Method
Here’s a pie chart breakdown of the 50/30/20 budgeting method:
Essentials – the 50% category – includes housing, utilities, transportation expenses, and groceries
Savings – the 20% category – includes emergency savings, sinking funds, retirement … and apparently per some sources, debt payments.
Everything Else – the 30% category – is the wants/not as “essential”: eating out, fun spending, travel, daycare, and so on.
Both of these plans are great guidelines to use – I’d recommend choosing whichever budget guideline that works best for you at this stage in your life.
Here’s a breakdown of a past monthly budget for us (based on a two pay period month for my husband and I; percentages for some categories have changed over the last several months):
Housing/Utilities
Our mortgage, house insurance, and property taxes totaled 19.8% alone. Add in utilities, and we spent 27.6% of our take-home income on both (June through September usually put us above 26% due to higher utility costs; the rest of the year, we’re between 25 and 26%).
Transportation – 10.6% total.
Due to being able to commute together as our offices are within walking distance of each other + my husband being able to adjust his work hours to mine, we’re able to save on gasoline. We fill up my vehicle every 7-10 days + fill up my husband’s a couple times a month.
Insurance runs an average of 2.4% of our take-home pay per month (we pay it every six months).
Oil changes – based on mileage we put on each vehicle – my husband’s vehicle needs three a year unless we take a long-haul road trip, my vehicle usually only needs two (its only driven to/from work and some weekend outings), and my husband’s old truck that gets driven a few times a month needs one a year. We spend the equivalent of .02% per month on oil changes (when spread out over a year. The newer vehicles we take to a local shop where we can use a discount card or promo coupon to reduce the cost; my husband does the oil changes himself on the truck.
We also have sinking funds for tire replacement/repairs. We’ve been lucky that two of our three vehicles are under warranty and the only repairs needed during our ownership have been due to recalls. Additionally, the husband’s truck needs a few things overhauled on it that can wait and we’ve saved up for covering the cost of sometime in the next couple of years.
Food – 8% total for groceries and eating out on a monthly basis for two people – we shop multiple stores within a few miles of our house/office to get the best pricing; our eating out budget varies by month, an average of 2-3% for it.
Medical – Varies by month. There are vitamins and supplements we both take (I have more than my husband due to health issues) that we replace as they run out, and I have a sinking fund I add to monthly for medical due to periodic dental work. We both pay out of pocket for some of our insurance coverage beyond what our employers provide, no more than $125 a month combined (but as we don’t pay it after we get our checks, we don’t consider it a part of our monthly budget). I factor these costs in between savings & misc; December I had a few medical costs that I used sinking funds to cover.
Pets – We spend roughly $35-40 per month on average for pet food and treats plus have a sinking fund that we add $150 per month towards annual vaccinations and medications (heartworm + flea/tick). We have been fortunate that our two of our three pets haven’t had major medical expenses; the one that has we were fortunate that pet insurance covered the majority of the costs on.
Savings (Sinking Funds) + Investing – Most recently we’ve managed to save 25 – 30% of our income in either post tax investing or sinking funds for future expenses.
Personal spending (includes splurge, clothing, activities, gifting) – again, varies by month. Some of the expenses we have sinking funds that we allot a certain amount to monthly unless we spend a bit more than planned, then the lower priority sinking funds suffer. We also accumulate our credit card rewards on our cashback cards to use as part of our gifting budget. The splurge part of this section of the budget is the one we’re working on monthly: to stick to a set amount so we can achieve other goals. This is also included in the misc category on the chart.
Charity – varies by month (we know we should donate more … and plan to increase this one as we work our way towards financial independence). This is also included in the misc category on the chart.
Emergency Savings – While we were building this account up, the amount fluctuated every month – we tried to put a minimum amount each month until we reached our goal amount. We alternated our focus with paying off one of our vehicles.
Debt (other than house and auto) – Since October we’ve had to resume paying the husband’s student loans (not included in the chart). Additionally, we have one auto loan payment that we’re paying an extra $100 per month towards.
