Creating First-Time Budget

**Seeker** · 01-25-2009, 09:42 PM

Basically

1) Generate a list of income (how much you have after taxes) each month.

2) Make a list of all fixed (or expected) bills (gas, water & power utilities, groceries, rent/mortgage, telephone/cell, cable/internet, auto repairs, gasoline, gym, current student loan, etc).

3) Make a list of all variable bills or expenses (like a doctor's visit).

4) Define needs versus wants in items 2 & 3 -- this identifies where you may be able to cut back spending some if needed.

5) Then subtract 2 & 3 from 1. That gives your "spare" money.

What to do with the "spare" money depends on how much there is.

Generally most people recommend a 4 to 6 month (of expenses) saved for an Emergency Fund. Since it sounds like that $120 in medical expenses put your budget into the "red" -- I'm sort of assuming that the difference between income and expenses is near the same.

Saving is also a good thing... just in general. Some people recoomend 10%-15% of saving all income. But it depends on a whole bunch of factors. Specific numbers too.

If you post a general budget along with the amount you earn each month... and your debts (amounts and interest rates)... I'm sure that someone can help clarify what they'd do in your shoes.

--- Oh also what you think about "changing the budget" is not necessarily correct. Electric bills and all sorts of prices go up, IMO you should look at the budget monthly and modify accordingly. The budget is not inflexible... it's meant to be a visual tool for planning and organizing priorities.

**George23** · 01-25-2009, 10:57 PM

Budgeting

"Seeker" above gave a good overview. Also, a very helpful free budgeting tool that you can use online is at mint.com. Of course, you could also pay for desktop software from MSN Money, Quicken, etc. and the software can help with some of the set up.

**jIM_Ohio** · 01-26-2009, 02:38 AM

1) spend less than you earn
2) save 20 percent of gross

**harshja** · 01-26-2009, 06:54 AM

Thanks for the advice. I have actually been using mint.com to organize my finances for about 2 or 3 months now and it has helped a lot (although several of my friends think I'm a fool for allowing a website to access all of my online financials at once due to security issues - that's a whole separate thread topic).

Some specifics:

My income is about $4,300/month from my job. Negligible amount from investments and interest.

I just copy and pasted my budget info from Mint and here is how I have it set up just for January:

$834 Mortgage & Rent
$500 Savings
$400 Eating/Going Out
$250 Groceries
$200 Miscellaneous Entertainment
$200 Car Service
$156 Student Loan
$150 Clothing
$117 Air Travel
$106 Television
$100 Electricity
$100 Mobile Phone
$89 Auto Insurance
$83 Pharmacy
$60 Furniture Payment 2
$60 Gas & Fuel
$50 Utilities
$47 Furniture Payment 1
$23 Gym
$23 Renter's Insurance
$20 Doctor Copay
$20 Drycleaning
$18 Haircut

There are obviously some dynamics to this. For instance, I don't spend $200/month on Car Service, but I decided I needed new car tires and I budgeted it in this month.

So using some of the advice given here, it sounds like I should start setting aside about 20% of my monthly income, or $860, until I have a 4-6 month cushion. I calculate my monthly expenses to be about $3,000, so that would mean $12,000-$18,000. I understand the rationale, but with that amount of money I could almost pay off my student loan in entirety instead of putting it into a savings account.

Thank you everyone for the help.

**skydivingchic** · 01-26-2009, 07:54 AM

Do you have access to a 401(k) through your employer? If so, are you contributing to it? Do you have an IRA? You should be contributing at LEAST 10% of gross to a 401(k) and/or IRA, probably a Roth IRA.

Setting up a budget will be a whole lot easier if you include saving a certain amount for non-monthly, variable expenses. This would include things like car repair and medical care. When I set up my budget, I was lucky enough to have kept a year's worth of bank and credit card statements. I went through these, added the year up, and divided by 12. That gave me a good idea of where to set my budget. If you don't have that historical data, write down every penny you spend for the next several months and use that as a guide. In order to get a bit of a cushion built up for things like medical care and car repair, you may want to put extra into this for a few months. My variable expenses include auto repair, pet care, gifts, and medical care.

Other things to think about are bills that are not due monthly. Examples might include insurance, magazine subscriptions, memberships, or vehicle registration. Figure out the yearly expenses for these and divide by 12 to get a monthly number. Since you are just starting out, if you are in the middle of a cycle, you will need to put away more than the monthly amount. So for instance, lets say your vehicle registration is expected to be $150 and it is due in 5 months. For now, you'll need to put away $30 per month. After it is paid this year, you can begin setting aside $12.50 per month.

You might consider having your paycheck split up into several accounts. How you do it is up to you, but here is an idea. Set up one main checking account that you use for day to day expenses. Set up a savings account which is used for "holding" the periodic and variable expenses.

As has been recommended, it is a good idea to set aside 3-6 months of expenses to cover you should you loose your job, have a medical emergency, need major auto repairs, etc. This should probably be in a seperate savings account.

Budgets aren't hard and fast. You will have to reveiw your budget periodically and make adjustments. For instance, last summer when gas prices were so high, I had to adjust my budget to allow more for gas. Now that it has gone down, my gas budget has been adjusted down some. You will forget things, which will require you to make adjustments. The key is that when something pops up, you need to ask yourself if that type of expense will continue to pop up. So, for your medical expense example, the answer is yes, you will need medical care again at some point. You may not know when or for what, but you know you need to incorporate it into your budget. So now you need to add a medical category and start putting money aside each and every month so that next time you get sick it is less likely to throw your entire budget out of whack. Over time, fewer and fewer things will "pop up" to throw your budget off.

**TBH** · 01-26-2009, 08:00 AM

I find it very hard to budget accurately until I've tracked my spending for a while. Then I can better predict unusual expenses. If you know you spend $600 per year on car repairs, then you can budget in $50 a month for it--which is an average. I have sometimes actually saved the money for this kind of expense--putting $50 a month into an account designated for car repairs, and then when they come up I take it out of that account and it doesn't whack out my budget. ING direct is a good place to open savings accounts for specific purposes cause you can name the accounts "car maintenance", "travel", "medical expenses", "emergency fund", etc.

You should start saving for retirement now too. If you get an employer match at your job, contribute at least enough to get the match. Otherwise, I'd say contribute 10% of your income to retirement and save another 10% for an emergency fund. Or you could do a smaller amount for retirement, say 5%, and do 15% to build up an emergency fund, knowing you're going to increase your retirement savings as soon as you have some savings.

I hear you about being tempted to pay off the student loan instead of saving an emergency fund. But if something big comes up, like a job loss or a medical crisis or your car dies whatever, you will be better off with the savings so you don't end up running up credit card debt. Maybe you could compromise--save 3 months' expenses first, then throw everything you've got at your student loan.

Oh, wait, I just noticed you have furniture loans. Pay the minimum on your student loan til the other loans are paid off, then add the amount you were paying monthly on your furniture loans to the student loan. Check out the Dave Ramsey books to learn about a "debt snowball" method of debt repayment.

How old are you BTW? Seems like you're on track to get out of debt. Posting the balances on your different debts and the interest rates will help folks on here advise you about what to pay off first.

**Aleta** · 01-26-2009, 08:33 AM

It is difficult to give any advice about your budget without knowing more information.

First of all, is 4,300 your take home pay or your gross? If it is your take home pay, there is a difference from from your stated $4,300. There looks like a $694. diifference unless that is taxes withheld from your paycheck.

Are you married or are there any children? Do you have your own place, live with someone, share expenses, etc.?

I ask these questions because your food costs including groceries and eating out seems a little high. There looks like there are many expenses there that could be lowered until you are in a better position.

Also, is the $500. a month going towards your 401K or is it continual savings that you deposit each month?

I really reccommend Dave Ramsey 's Total Money Makeover Book as well. You can pick it up from your library as well as many other financial authors.

How much debt do you have including the student loans and what is your interest rate on the furniture? There are a lot of variables here and more information would be helpful.

Dave Ramsey reccommends saving $1,000 emergency money and then snowballing your debts.

I also budget in money per month for irregular payments such as car repair, house maintenance, gifts, holiday, vacation, house insurance, car insurance. I divide the categories by 12 and deposit this money monthly into my money market account.

**jIM_Ohio** · 01-26-2009, 12:43 PM

Originally posted by harshja View Post

Thanks for the advice. I have actually been using mint.com to organize my finances for about 2 or 3 months now and it has helped a lot (although several of my friends think I'm a fool for allowing a website to access all of my online financials at once due to security issues - that's a whole separate thread topic).

Some specifics:

My income is about $4,300/month from my job. Negligible amount from investments and interest.

I just copy and pasted my budget info from Mint and here is how I have it set up just for January:

$834 Mortgage & Rent
$500 Savings
$400 Eating/Going Out
$250 Groceries
$200 Miscellaneous Entertainment
$200 Car Service
$156 Student Loan
$150 Clothing
$117 Air Travel
$106 Television
$100 Electricity
$100 Mobile Phone
$89 Auto Insurance
$83 Pharmacy
$60 Furniture Payment 2
$60 Gas & Fuel
$50 Utilities
$47 Furniture Payment 1
$23 Gym
$23 Renter's Insurance
$20 Doctor Copay
$20 Drycleaning
$18 Haircut

There are obviously some dynamics to this. For instance, I don't spend $200/month on Car Service, but I decided I needed new car tires and I budgeted it in this month.

So using some of the advice given here, it sounds like I should start setting aside about 20% of my monthly income, or $860, until I have a 4-6 month cushion. I calculate my monthly expenses to be about $3,000, so that would mean $12,000-$18,000. I understand the rationale, but with that amount of money I could almost pay off my student loan in entirety instead of putting it into a savings account.

Thank you everyone for the help.

There is a HUGE difference between listing your expenses for this month and having a budget.

The items I bolded/underlined are GREAT examples.

Car repair- that expenses exists now, but might not exist every month. If this were a budget, that would mean (to me) that the $200 expense recurs each month and you spend $2400/year maintaining your car. Is this accurate?

You pay $20 now for an office co-pay. Do you have access to flex plan so this is pre-tax? otherwise this cost you $25 in income to spend $20 at doctors. If you save pre-tax, your budget goes up $5 per month.

Is that savings going to an investment account or savings account?

If you have a student loan which you can pay off in one month of $860, I would do that just to remove one line from the budget.

You pay $100/month ($1200/year) for insurance. Is there a reason this is not ONE payment? If you combine renters and car, there should be a discount available. In addition have you looked into paying car insurance once per year or 2X per year? That might save you $10/month or so.

Save $5 here, $10 there and you begin to find ways to optimize your spending.

**wincrasher** · 01-27-2009, 07:24 PM

You are off to a great start. You'd be surprised how many cannot even tally what they have going out each month.

Ever heard the expression "pay yourself first"?

Believe it or not, an adequate emergency fund is the very foundation of your financial future. In this economy, no job is secure. Build your emergency fund of 6 to 8 month's expenses first. If you keep your job, then you have a nice cushion to borrow from yourself instead of getting loans or running up credit card balances.

So set a figure to get there first. Make that your top budget item. Next is your rent/mortgage, then debt payments. Everything else then needs to fit or be eliminated.

I assume you got furniture loans because you are just starting out - those are generally a bad deal and you shouldn't do that again.

Creating First-Time Budget