Thursday, 3 Apr 2008
People often wonder how they should go about making a budget. In my opinion, CREATING a budget is easy. It’s STICKING TO the budget that can be hard. Here are the simple guidelines I used when I created a budget. Of course, you can tweak these percentages as need be.
tithes or charity - 10%
retirement savings - 20%
savings (e-fund) - 5%
taxes (estimated effective rate) - 15% for homeowners, 25% for renters
housing - 30% (mortgage/PITI and maintenance) for homeowners, 20% for renters
everything else - 20%
I’ve found that using these amounts as a guideline will have you well on your way to financial stability/independence.
April 3rd, 2008 at 8:07 pm
I have written about budgets for over ten years, several of which have been published. And yes, they are easy to concoct and difficult to swallow, even in the short-term. And even though your percentages are well off of what most people experience (tithing - 10%?, mortgages and all it entails - 30%?) there are some things that even someone who is nowhere near to your easy, breezy budgeting can do right now.
Thanks for the comments, Paul. I certainly think those percentages can be achieved if people apply themselves. Traditional advice has suggested no more than 28% of gross income for PITI so 30% for mortgage and maintenance should be achievable. If a person is paying much more than that, then they have probably overextended themselves.
Stop the leaks. It is often the fees on everything we do from banking to getting our tax refunds back. Even my twenty-year old was racking up bank fees simply because he had not opened a debit account and was using a card they gave him years ago when he opened a savings account. They were charging him twice for each ATM visit. If you look hard enough, the average person can find about $20 a week in hidden charges.
Stop tipping for coffee. I know, that sound harsh and we all love our coffee (brewing it at home is still the cheapest way), but when you tip that barista for drawing a regular cup of coffee, you are paying the store owner who, because of your generosity, can pay their employees less than a living wage. Some save so much, they offer their workers health care. Stop saying, “keep the change.”
Start shopping around. It is truly one of the most annoying things to do but when you really keep an eye out for stuff you (think you) need instead of waiting until you just can’t live without it, you will save. Pass on the first deal - unless it proves to be the best.
You’re absolutely right on these. People often nickel-and-dime themselves into financial peril.
And focus on buying down that debt. If you put tithing at the top of your list as you did, debt might be considered down right immoral. If you think about it, too much debt and the cost of debt service takes valuable dollars away from the charities/religious organizations you support.
I prefer to avoid debt when possible and work to eliminate any debt incurred (i.e. mortgage) as soon as possible while not compromising other financial goals. Some advise that you’re better off, for example, investing instead of making extra payments to debt. This can be true, in terms of the numbers, in some instances. However, I much prefer being debt-free than attempting to ‘leverage’.
Just a few thoughts as I stopped by.
Good job on what you are doing here…
Thanks for stopping by. I hope you return.
April 6th, 2008 at 1:27 pm
Hey Savvy, these budget guidelines are good ones. My main focus now is “avoiding debt” and “buying down debt.” I save for retirement, but I think if I become debt free, I’ll have a whole new mindset.