Budgeting

[reptile411]

Ok I am having a very big problem here. We make far more than we spend wich is a good thing. Its nice watching the bank accounts explode and knowing I can pay cash for a new car if need be but I think with some simple budgeting we can do far far better however I have a problem. I don't know where to start, where to end, what to include. I have never ever had to budget anything and have no clue. Can anyone give some pointers or posibly a sample budget I can base ours from? Thanks a million in advance. I hope our crappy economy is treating everyone well.

[Broken Arrow]

Um, I can't tell if this is serious or not.

Can you please give us some figures?

Have you considered a fee-only CFP?

[reptile411]

Oh for sure I am not joking. Whats a fee only CFP? What do you need as far as figures go? We make about 6K per month and our living expenses are about 1,700 per month. We really have nothing set aside for fun or anything. We put about 4,300 in the bank every month and just let it grow month after month. If we want something we will charge it and then transfer the money from the bank to the card to keep the balance at 0. I think we can do better and at the same time with no budget it has the possibility of being fairly volatile For example if one of us had a problem and stopped working we may have a problem in about a year or so when our funds start to dry up. I feel very worried about living this way with no plan in place. I look at some of the budgeting stuff online and for some reason just cant get it. I have tried using the tools in MS Money Plus as well as Quicken but I end up in the same mind numbing position of not understanding how it all works. I never took an economics class "maybe that's a good idea" or ever had to learn to manage my money properly. My entire life I have just had a good habit of making money and always having it. Now I want to learn how to manage it in hopes to be able to keep even more of it. An early retirement sounds good. I am 30yo and have been working sence I was 16yo. I keep only one CC and one Lowes card, I do currently have a car payment but plan on paying it off 3 years early at this rate and we purchased our first home in Nov 08. Perfect credit, and really no hobbies per se. Need anymore info let me know.

[skydivingchic]

The first thing I would recommend is that you write down everything you spend money on for a few months. That should help you get a handle on where your money is going. From that information you can begin to establish a budget. You will also need to establish sinking funds for unexpected but inevitable bill - car maintenance, home maintenance, medical copays, etc. For reference, I have the following budget catagories: Mortgage, HOA Fee, Gym Membership, Groceries, Gas, Car Registration, Car Maintenance, Personal Care, Pet Care, Insurance, Roth IRA, Medical Care, Spending Money, Mvelopes Subscription, Electric Bill, Cell Phone, Gifts, Personal Savings, and Emergency Fund Savings. Once you have a handle on where your money is currently going, you can decide if it is in line with your needs and goals. I personally use Mvelopes for my budget and can't say enough good about the program, but you could do much the same thing with an Excel spreadsheet.

You mention putting over 4k in the bank each month. Does this include retirement savings or is that seperate?

There are people on this board who don't follow a budget per se, but simply make sure the savings part is taken care of first, live off what is left, and not worry exactly how much went to what each month. As long as you are meeting your goals and obligations, that is also a completely legitimate way to "budget."

[reptile411]

Thanks for the info, No that $4,300 dose not include what I contribute to my 401K as well as my pension witch my union and employer deal with. That $4,300 is after everything.

[wincrasher]

I don't think you need to worry about budgetting - you seem to have your spending under control and obviously spend way below your means.

I'd concentrate on learning about investing and what kind of returns you are getting on that $4300 a month in savings. You must have a considerable nest egg that I hope is in more than a passbook savings account.

[MonkeyMama]

I am not sure if you need a budget but you do need a plan.

I think overall a budget is not necessary if your expenses and low and/or your income is high. We used to save about $3k/month when we both worked (Easily) and though we were pretty frugal we didn't have a budget. There was little point - the "budget" was living on one income only.

My next questions to you are what are your goals? Any desire to purchase a home? Have kids? Etc., etc. Thank to the future and what you will need money for - and start earmarking your savings for your goals.

If your only savings goal is retirement, then are you maxing out your 401ks and IRAs? (Putting in as much as legally possible?)

The next step would be considering investing some of that excess in taxable accounts - mutual funds and such. Where you put your money depends on your risk tolerance and what your financial goals are.

[GREENBACK]

The only budgeting I do is to track my expenses by category in a simple composition book. It's amazingly simple and as you go forward you'll see what you spend and where. You're obviously not overspending on anything but it's interesting to note what you spend your money on. When you see this you can formulate contingency plans for most emergencies. I keep a large liquid account for major emergencies(medical,unforseen...etc.) and one for general EF(house, car, etc.). everything else is invested. Given your current situation and large amount of disposable income I don't think you need anything complicated.

[swanson719]

The general point of a budget is to log your spending, then to see where you can lower your spending in order to further maximize your residual income (Net pay minus expenses each month). What you would do to start is list all of your expenses, and then see what you think is too high for something, and find ways to lower that expense. Like paying $200 a month for a cell phone plan is far too much unless you use it to generate income, so you look into different providers and different plans, and find one that meets your needs and you switch to the cheaper one.

A fee only CFP is a certified financial planner who charges by the hour instead of taking a commission. This is the best type to see because the commission ones charge a percentage of what you spend, also called a load when referring to mutual funds. For instance, if you spend $10,000 on mutual funds at a 5.75% load, you would really be spending $10,575. The extra $575 goes to the company you bought them through. This is a bad idea because there are many companies who don't charge that load.

A fee only CFP will really help you, though you need to do some research into retirement planning on your own. The more interest you take into it on your part, the more you'll be able to learn. A fee only CFP is looking out for themselves as well, so they will either spend a lot of time with a single client, or spend some time with many clients. The more you require of the CFP, the more you'll pay, but the better off you'll be.

Some people have what are called Year Funds. With these, you pick a year you want to retire. Then you pour money into that fund. They manage that fund as if the world was ending that year. These are both good and bad. They are incredibly easy to maintain for someone who has a hands off approach and wants it done for them. It is not something you can change once you buy in. You can stop contributing money, but you cant choose your funds in these.

For a hands on approach, you need to find a good, knowledgeable fee based CFP who will get you into high yield funds. You're in an age group where you need to first contribute to your 401(k) to the point of your company match, meaning if your company will match your 4%, then you put in 4%, but not a penny more. Then you need to max out what is called a Roth IRA. You use money that has been taxed to contribute to these, but when you draw them out after age 59 1/2, it's tax free. 85% of the value of an IRA at retirement is growth, so you're avoiding taxes on 85% of your retirement. This is the equivalent of not having to pay capital gains tax. It's a great tool, but has a limit.

You said you make $6K a month, or $72K a year, net. You need to be investing 15% of your net income until your house is paid off, which would be $10,800 a year. This would be good in a Roth IRA. If you don't have a house payment, make it about 35% of your net income, minimum, or $25,200. That catches you up for 12 years of not investing, and leaves you comfortable in your golden years.

If I woke up tomorrow in your shoes, I would first pay off the car. You're paying interest on it, which is giving money for free to the bank because they do you the favor of not having to have $15,000 up front to pay for a car. If you pay this off, you'd be saving yourself whatever you pay in interest, and have that much more monthly to save.

I would second ensure I had at least 6 months of expenses in a good money market mutual fund that is FDIC insured. That means you put around $10,000 in an account that grows at least 4.5% a year on average over the last 10 years, and leave it alone, never to be touched unless your car explodes or you need a new roof, etc. This is your emergency fund. 6 months is the advised minimum, but a years worth of expenses is usually better. It sounds like you could put about $25K in this type of fund in about 6 months.

Then you contribute the 15% until your house is paid off, and when it is paid off, bump up to the 35%+. At that point, if you still have money left over, you enjoy life. Spend money on other people, help them out. 35% is a great number to put into retirement, but if you guys can keep up the 70% you're at right now, you can retire when you're 50ish and be in the same standard of living you are right now. 35% would put you retiring at 63.

If invest $4,300 monthly each month every month from today until 20 years from today in good growth stock mutual funds with an average of at least 10%, which you should because they are there, you will retire at 50 with $3.3 Million. If you stop contributing then, and draw out 4% of that per year, you will be living on around $130,000 before taxes and still have you're money growing. You could live on $300,000 before taxes each year and never have the account total drop below $3 Million, though it would still be volatile. Retirement experts advise putting your money into highly stable investments like government bonds, CD's, or money market accounts. Also, land usually appreciates at the same rate as the stock market, so looking into becoming a realty investor as a silent partner might not be a bad idea.

[disneysteve]

I don't think you need to worry about budgetting - you seem to have your spending under control and obviously spend way below your means.

I am not sure if you need a budget but you do need a plan.

I agree. My wife and I do not have a budget. Never have. We simply don't need one. We live well below our means. How much we spend on groceries or gas or clothing each month just isn't an issue we need to worry about.

We do, however, have a plan. Currently, 20% of my gross income goes to savings, and I have a specific allocation of where it all goes. My wife contributes 50% of her gross to her 401k. We live on what is left. As long as the savings money is going away each month, it really doesn't matter how we spend what remains.

That said, I'm sure we could pay more attention to our spending and save an even higher percentage of our income, and that is something I've been thinking about lately. DW and I have talked about a couple of monthly expenses that we may eliminate to trim spending and boost savings. Even if we don't, though, I feel that we are on track to meet our long-term goals with the plan we already have in place.

[kork13]

I mostly agree with the rest.... If your income well exceeds your expenses, I wouldn't worry too much about it. However, it is good to have a plan, as DisneySteve brought up. I technically have a "budget", but really it's just a planning method for me, so that I can look at it and know approximately where my money is going each month. At the end of each month, I also use it to see if certain expenses were higher than normal for some reason. I don't stick hard and fast to my plan, it's more just to QC my spending/saving.

I think that's what you want to do... Build a plan for yourself. Pen down where your money goes each month (expenses), but also some number-crunching and decide specifically what you want to do with the rest of your income. Just for arbitrary numbers, say you decide you want $1500 to your savings, $2000 to your investments, and so on. Automatic transfers/investments are very helpful. Then just set aside the excess as your 'play money', that you can use to cover whatever costs may come up. (net income - regular expenses - savings/investments = play money)

[blankcheck]

I'll actually go a step further and say that you have the most elegant budget possible. Without much prompting you let us know what your monthly expenses are, the money you have left over, and that you put other money already into a retirement. plan. THAT'S ALL YOU NEED IN A BUDGET. Like everyone else has said, just keep simple plan. Some examples include:

-X number of months worth of expenses (where X can be 6 months, 12 months, whatever you're comfortable with) in a cash account

-if you have kids, maybe a 529 college savings account

-paying off any other debt, even the relatively cheap debt like mortgages or fixed student loans, in full

-charity donations

-extra retirement goals

Good luck with everything!

[reptile411]

I am not sure if you need a budget but you do need a plan.

I think overall a budget is not necessary if your expenses and low and/or your income is high. We used to save about $3k/month when we both worked (Easily) and though we were pretty frugal we didn't have a budget. There was little point - the "budget" was living on one income only.

My next questions to you are what are your goals? Any desire to purchase a home? Have kids? Etc., etc. Thank to the future and what you will need money for - and start earmarking your savings for your goals.

If your only savings goal is retirement, then are you maxing out your 401ks and IRAs? (Putting in as much as legally possible?)

The next step would be considering investing some of that excess in taxable accounts - mutual funds and such. Where you put your money depends on your risk tolerance and what your financial goals are.

My goals are to become wealthy beyond comprehension and retire very early. We already have 2 kids and Purchased our first home last year.

[reptile411]

So If I am understanding a budget is only for people for example that live paycheck to paycheck? I keep only a few hundred in my day to day savings, a couple grand in checking and the rest of my money get poured into a high interest savings account. One thing that helped a lot was opening an account with ING I hate them for killing my rate from 3% down to 1.5% but oh well. The good thing is I see a new motorcycle. IU think oh I want that so I go home and go log on and start adding up how much I need to transfer. After thinking hmmm it will take 3-4 week days to transfer 11K I bet by then I really wont want that bike. It works every time. Having your money just out of arms reach is a great way to keep it. Especially if you are like me and like toys. I do dabble in investments but I hold a lot back now what with the horable markets. I have several companies I own common stock in for the long term but all I am doing in this market is day trading wich all in all has been very profitable to me thus far. We over pay our house payment every month to pay it off early, We have decided to never sell the house but rather keep it as a rental when it is time to move up in life. This should give us even more income "1K per month or so" but less actually after factoring in insurance and taxes and repairs but more all the same.

[disneysteve]

So If I am understanding a budget is only for people for example that live paycheck to paycheck?

I wouldn't really say that, but certainly people living on the edge need to watch things much more closely than those who have a big surplus every month. If you spend an extra hundred or two, it doesn't throw your whole system out of whack. For others, spending an extra $20 might cause problems.

Despite what I said, in a way we do have a budget. We budget our saving and investing. We don't budget our spending, though. As long as the saving and investing is on track, that's all that matters IMO.

Of course, this also depends on you not being big spenders. My wife and are both careful with our money. Neither of us is the type to go out and spend with disregard for financial reality. Other people who have spending issues need a budget to keep on track.