Most books and PF authors will tell you the rule of thumb on budgeting is to take a percentage of your income and it looks something like this:
If you look at it on a monthly basis, it looks like this in your budgeting tool:
But that’s kind of useless if you don’t know what these vague categories contain.
Does “Housing” include utilities?
Does “Life” mean things for your pet as well as your own groceries?
The answer to both questions above: Yes.
The trickiest category is Housing for me because it can be hard to think about what goes into it, whereas the category of Life is the fattest one.
Here’s how I see it:
HOUSING is anything to do with SHELTER = 35%
- Utilities (Water, Gas, Heat, Electricity)
- Rent Insurance
- House Insurance
- Home Maintenance (not buying furniture, actual home repairs)
- Condo Fees
LIFE is pretty much everything else = 25%
- Eating Out
- Pet Stuff
- Furniture for the home
- Home renovations and maintenance
- Medical needs (medicine or doctor/dentist visits)
- Bank Fees
- Holiday Spending
TRANSPORTATION is how you get to where you’re going = 15%
- Public transportation
- Maintenance for the car
- Car insurance
- Driver’s License/Vehicle Registration Fees
- Parking costs
- Parking Tickets (you better not get any…!)
DEBT REPAYMENT means: Money you are using to clear your debt = 15%
- Pay down your debt with the the highest interest rate
- …then take that money after that debt is gone, and pay extra on the next debt
- …all the way until you are debt free!
SAVINGS means: Money you don’t touch on a daily basis! = 10%
- Retirement savings
- Emergency funds
- Short-Term savings like a Travel Fund
- Home Maintenance Fund (should be 3% of your home’s gross value in an account)
WHY DOESN’T THE TELEVISION, INTERNET, OR THE TELEPHONE GO UNDER “HOUSING”?
Because you don’t need either to have shelter.
Plenty of people live without any of those things.
I only have a cellphone, and even that plan is shared with BF, so we treat it like our portable home phone.
Housing is a roof over your head. What does it take to run a place like that? Insurance, Utilities and the Rent or Mortgage payment.
Therefore, stuff you pay for that you use to entertain yourself or communicate with others as part of your Lifestyle goes under Life.
WHAT DOES YOUR GENERAL BUDGET LOOK LIKE?
As we all live in different parts of the world, in different areas of the country, and have different incomes, this will definitely NOT be personalized to you.
For instance, you may have a pet, whereas I don’t, and you need to budget for that.
Or you live in the U.S. and you need to budget for healthcare, whereas I don’t in Canada.
Here’s what a typical budget would be if I made one for myself for a month, living in a hotel with a car.
I don’t have a car right now, but I would get one secondhand in cash if I had to use it for work and I couldn’t take the bus.
MY IRREGULAR INCOME AT ~$70K AND WHY I CHOOSE A BUDGET AT ~$40K
Since my income is so irregular, I gave myself a generous ~$40,000 gross income a year as a budget because I assume I can always get a job that pays at least that per year if times get rough.
Basically, the less I spend, the less money I need to earn per year (gross).
Since I can always spend less than ~$40,000, but that’s the right gross income to maintain my current lifestyle.
As I’ve really only been working full-time 2 out of the 5 years or less than 50% of the time, if I am being honest.
So my income to date has been on average $70,000 gross per year as a freelancer for 5 years.
That is about $54,700 net per year as an income in Ontario.
As I’ve amassed around $200,000 in my net worth to date, I’ve saved $40,000 net a year.
Actually, it’s $60,000 more than that because that’s how much my debt cost when I started working, and cleared it in 18 months with my budgeting tool, but I digress.
All this really means I’ve been spending a lot less than $40,000 gross a year, even with all my traveling, and dipping into savings when I want to buy things, and that’s partly due to being a consultant and having your life subsidized because you’re always traveling.
Therefore ~$40K is my maximum budget because I account for if I have a car, pay for gas, insurance, license plate renewals and so on, which I haven’t had to in about 2 years.
I also always max out every retirement fund you can think of which helps my taxable income, and save a lot of money because I share the costs 50/50 with BF.
Click to biggify and read my notes, hopes and dreams…
DEBT = I don’t owe anyone, anything, which helps a lot.
SAVINGS = All the rest of my money. See above about saving everything else.
You will notice that I spend a lot of money on Food, Clothes & Electronics for instance, but barely anything on Cellphone, nor on anything like Furniture or Household stuff.
This is in line with my minimalist philosophy to spend on what you care about, but not on things you don’t.
I have less things in terms of quantity, but each item costs more money because of I am willing to shell out for quality because it lasts longer.
There you have it, my general household budget that I’ve been entering in my budgeting and expense tracking tool.
I also plan on lowering this spending for 2013.
My new Ideal Household 2013 budget is coming up next week.
Enough is enough.
Back to you!
WAIT, THAT 15% DEBT REPAYMENT AMOUNT IS TOO LOW FOR MY DEBT
Where you start to get a problem, is where you realize that your debt repayment minimums may be bigger than 15% a month, maybe even double.
In which case, you need to do two very important things:
- Make more money
- Start cutting back on other parts in your budget
You can’t put more money on your debt if you don’t have it to spare.
There is also no other choice, and no other way.
Pick #1 or #2.
If #2 is not an option and you can’t cut back, make more money.
WHAT DO I DO IF I DON’T HAVE ANY DEBT?
People say that the 15% of the Debt Repayment should be absorbed into other areas of your spending so you can have a nice life, but I am a big proponent of sticking it all (or at least the bulk of it) into savings, and saving a hefty 25% of your net income per month if you can.
If you’ve already lived without that 15%, what’s it to you?
I’ve always felt that 10% of your net income is far too low of a number to be saving in general for short-term funds, retirement and anything in between.
I like 15% – 20% instead as a rule of thumb, although my personal rule of thumb is: as much as is reasonably possible.