Where your money should be going
For anyone who wants to improve their financial situation, the first step is usually tracking their spending to see where their money is going. The second and much harder step, deciding where their money should be going, usually means a drastic change in financial habits.
Housing is probably the largest expense, what is the maximum that should be going to this budget item?
With housing, we are including rent or mortgage payment, insurance, maintenance and utilities such as gas, electric and cable. Your monthly expense on these items shouldn’t more than 30% of your net monthly income.
What should be the next two biggest categories?
Transportation which includes loan payments, gas, maintenance, insurance and even Uber rides. This category should be 12% or less. The second largest is your food or grocery bill at 10% of net monthly income. This is just food, not personal care items.
How much should we be saving?
Ideally one should strive to reach 10% for retirement and another 5% for emergency savings, large purchases and other non-monthly expenses. If you have children, you may wish to make this even higher to save for college expenses. It is important to at least be at the 401k match level from your company so that you don’t leave money on the table.
What if you have other debt such as credit cards or student loans?
All other debt payments should be at 5% of net monthly income and this includes student loans, credit cards and personal loans. It is important that this category isn’t at 5% because you are only paying the minimum payment on credit card debt.
What if your student loan payment is more than 5% of your net monthly income?
That is where you really need to look at transportation and housing expenses. These are the most likely categories to trim to free up more monthly income for your debt coverage. High credit card payments would be another reason to lower transportation and housing costs.
Are there categories that most people find they under budget for on a regular basis?
Personal care such as haircuts and clothes and medical for over the counter meds and out of pocket expenses. Both are probably going to be around 4% of your net income per month, perhaps not every month but during the course of a year, that is usually the average.
There seems to be one missing, entertainment and eating out, what should be the goal for this budget category?
Ideally, this would be at 4% of your net monthly income. This can be difficult and will likely fluctuate but it is the one budget category that can be changed the quickest and the one that is completely under our control.
Is it important to hit your budget % every month in every category?
That is a very good point, the answer is no, the key to great budgeting is having it balance at the end of the month. Don’t cut back on savings or debt repayment but otherwise, every other category can be adjusted when one area requires more spending. And when you have excess funds, put them in savings and don’t spend because you have it left over.