The summer I finished college, I quickly got a part-time job. Don't misunderstand, though, this was not the kind of part-time job that helped me squeak by - the first few months, as I worked my way into more hours, I was making $300-400 a month. Talk about being broke.
By the time the winter came, I was more in the realm of $600-800 - enough to keep my car rolling and make the minimum student loan payments when they kicked in while my parents covered everything else in my life.
The next spring, I got a promotion, and started making enough to put me above the poverty line. I knew it was time to make a budget.
There are a million people and blogs out there that will tell you how to set a budget, and I did a lot of research before making my first budget. Two years later, my budget has changed to reflect a growing income and changing student loan payments, but the main tenets have remained the same. A budget is personal, so my budget theory is personal. I believe a good budget should:
- Focus first on paying for necessities: rent, groceries, utilities, transportation
- Focus second on paying off debt. NOT minimum payments, but aggressively paying it off.
- Be envelope-based. This means that you intentionally set aside a certain amount to spend in each category (groceries, gas, clothes, enterntainment, etc) and when you run out of money in that category, you stop spending for the month.
- Think long-term. If you're paying insurance every six months, calculate the monthly amount and include it in your budget so you aren't spending money you'll need soon.
- Reflect your priorities. It's more important to me to build up a "romance fund" so I can see my long-distance guy than to buy new clothes, and the amounts I put in each category reflect that.
- Be zero-sum. The total of your spending categories should equal your income. Every dollar should go to a category, with no extra. If you plan out each category and have extra, recalculate. Give yourself a little breathing room in tight categories, add to your debt pay-down plan, or put the money in your savings every month.
- Hurt a little. If your budget doesn't pinch a little and make you think twice about purchases, then it is probably not getting you toward your long-term goals (yes, you should have long-term financial goals).
If it's your first time making a budget, it can seem kind of impossible to figure out what categories to create and how much to put in them. To help get started, I really like Dave Ramsey's Monthly Cash Flow Plan. It lists more than 50 categories you should think about, and it offers "optimal" percentages to help you see what's reasonable or not. Again, my percentages don't always line up because some categories are more important than others - I don't always agree with Dave Ramsey - but it helps me be more conscious of where I might be spending too much.
