What Should You Be Budgeting?

Santa Claus. Sasquatch. The family budget. Are these all great myths? Of the three, which is most likely to be caught on film? If you're like many Americans, the idea of both Santa and Big Foot joining you for dinner is more realistic than the idea that you'll sit down afterwards and plan out your week's spending. The truth of the matter is that budgeting - as prescribed in textbooks and self-help articles - is about as successful for most people as dieting. Even if you get started on the right foot, chances are you'll be right back where you were, with the same bad habits, in just a few weeks or months - if you make it that long!

But this doesn't mean you should throw your hands in the air and give up. On the contrary, budgeting is an important undertaking for the financially literate individual or household. But you have to be realistic about setting your priorities and flexible when it comes to implementing your agenda.

Determining Your 'Fixed Expenses'

Let's take a look at Tom and Theresa, a young couple of below average income. These are often the type of people who have the hardest time budgeting.

Tom is a telemarketer earning $10 per hour, and Theresa is a receptionist earning $8.50. After taxes, their household income is about $2,750 per month. Unfortunately, they have no sources of income outside of their wage labor.

First, Tom and Theresa need to account for their fixed expenses. They live in a two-bedroom apartment in Michigan with monthly rent of $750. They have car payments of $330 and $290, respectively, with car insurance costs of $240 per month. They each have unlimited cell phone plans at $95 a month each, which means that they don't need to have a landline. Cable TV and the internet cost them $100 a month, combined. In total, Tom and Theresa's fixed expenses are $1,900. This means that they have just $850 left over for variable expenses and discretionary funds.

Accounting for 'Variable Expenses'

Fixed expenses are easy to account for - they're the same every month. Variable expenses are a little trickier, since they change from one month to the next. An example of a variable expense would be Tom and Theresa's natural gas bill. In Michigan's winter months, it can easily surpass $100, even for a small apartment. But in the summer, when natural gas is only used for cooking and hot water, the bill can be as little as $15. Luckily for Tom and Theresa, the fluctuations of their electric bill serve as a counterweight to the gas bill, with the electric bill being highest in the summer when they run their central air conditioning, and much lower in the winter. As it works out, Tom and Theresa need to allocate about $130 per month for gas and electric each month. Luckily, their landlord pays their water bill!

The next major variable expense is food. Tom and Theresa know that they spend too much money on their lunch breaks each day, so as part of their budget-making process, they resolve to limit their daily spending to $5, and they commit to eat peanut-butter-and-jelly sandwiches on the weekends. This makes their combined lunch budget about $200 per month.

So to recap, Tom and Theresa had only $850 left over after their fixed expenses. With $130 in utilities and $200 in lunches, they're down to $520 to pay for the rest of their variable expenses plus any discretionary spending - and so far, they've only budgeted for one meal a day each! Well, one thing they decide to stop doing is eating out so much. Spending $10 at McDonalds or $30 at Applebees really puts a hole in your wallet - not to mention what it does to your body. Tom actually really enjoys cooking, but it seems as though he and Theresa never have enough money to buy top-quality ingredients. Well, if they stop eating out 3-4 times a week, they will be able to increase their grocery budget so that Tom can make gourmet meals. They decide to budget $100 per week, $400 per month, for groceries. Now they're down to $120. Theresa works just a few miles away from home, so she only spends around $20 a month on gas, but Tom needs to spend more like $20 per week. This leaves them with just $20 of their income left over!

Be Realistic When Budgeting

Clearly, Tom and Theresa - despite their good intentions - are on an almost certain path to failure. What can they do? The cold-hearted would say "get better paying jobs." Aside from that, the answer is that they need to somehow cut their spending. Perhaps they can do away with their cell phones and get a broadband phone, which would save them around $160 a month. Perhaps they can pack lunches instead of eating out each day, which would save them another $150+. Applying the bulk of this $300 to paying off one of their two cars would eliminate an additional $290 - $330 in expenses, and if the car no longer warranted it, they could then drop the full coverage insurance and save another $100 a month. If Tom and Theresa could make these simple changes, then in less than a year, they could go from having just $20 in discretionary income to having more than $700. The only challenge is getting there.

Of course, the problem with couples like Tom and Theresa is that they are living check-to-check, and thus they are vulnerable to the slightest financial upset. Imagine Tom's car breaks down. The couple has no savings, so Tom needs to take out a payday loan to get it repaired. Now he works all week to pay back the payday loan, and needs to take out another payday loan to meet the family's living expenses for the following week. This is the cycle in which many low-income families find themselves trapped. The important thing is to develop a budget, live within your means, and avoid payday loans and other debt traps. Realistically, you need to make enough money to cover your fixed and variable expenses, with at least another $100 left over for discretionary spending and savings. Everyone deserves at least $20 a week in spending money, so if you can't make a budget without ensuring yourself this, you need to work on cutting some of the fixed or variable expenses. Good luck!

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