I’ve gotten a few emails these past few weeks about how to create a realistic budget. First I feel it necessary to point out that I’m not big on budgeting. My budgeting style consists of automating debt payments and transfers to savings, and then spend, spend, spend whatever is left over until it’s absolutely all gone. Other people like to budget more carefully, but I’ve found if I get too into it, I start to feel constricted and will self-sabotage at the first opportunity.
So when I’m asked, “How much should I spend on…?” my response is, “whatever you feel is right” — but there are suggestions. My personal finance hero, Gail Vaz Oxlade, suggests a balanced spending plan like this:
Awesome! I think that works for most people.
That’s your net income, by the way. Don’t make a budget with your gross income. You don’t get to spend your gross, you only get to spend your net.
Personally when I look at that pie chart, my thoughts are: 35% is way too much to spend on housing, and 15% is also way too much spend on Transportation. 15% is not nearly enough to put towards your debt, and 25% on “Life” doesn’t sound fun at all.
This is a chart representing ALL MY SPENDING for 2012:
Now, I have a few more categories than the Gail way because I like to be a bit more detailed, but ultimately, I know where my money is going (this chart actually isn’t a great representation because it leaves out all my Savings which are labelled as “transfers” in my money-tracking program and therefore don’t register as “spending” — you can see I did buy a few thousand dollars of stocks though under “investments”! I save 20-30%+ of my income any given month).
If you’re thinking it looks like I’m having a lot of fun, you’re right — but that’s because I’m not paying for a car and living in a cheap apartment, so I don’t need Gail’s generous 15% and 35% for those categories, respectively. Instead, I pay what I have to and then I can use what’s left over to boost my debt payment and have a little more fun.
Long story short, you do what’s best for you!
Note that best for you doesn’t mean neglecting savings or dragging your debt out over 40 years. That’s not what’s best at all — that’s actually probably the worst possible thing! Likewise, your budget shouldn’t be about maxing out the suggested categories. If you can afford a $1,200 apartment according to the pie chart, don’t go out looking for that if a $900 one will do the trick.
Secondly, don’t worry what other people are doing. I spend an obscene amount on food because I like to cook and bake, and enjoy going out to eat 3-4 times per week. This isn’t a bad thing, this is just something I value and am willing to put a bit more money towards.
Lastly, recognize that your budget will change over time. Once my debt is gone, I’m hoping to roll that whole pie slice into more savings and investments. Additionally, I committed to spending less than $4,000 on personal travel in 2013, which should cut down that Life category significantly. Furthermore, as my income increases I’m hoping that my lifestyle doesn’t inflate at the same pace, so that should change the balance as well.
How do you make a budget?