Budgeting Methods

[930addict]

I was curious what process others go through when setting up their home budgets. I read somewhere about a 50/20/30 rule where 50% of your money goes toward essentials like mortgage, electricity and such. 20% goes towards financial priorities such as retirement and 30 to lifestyle.

What methods do you use to create your budgets?

[onewhippedpuppy]

We just went through creating a budget, as we are trying to get our house paid off (only debt). My wife is a huge Dave Ramsey fan, and we largely followed his guidelines to set up our plan. 15% to investing right now, which is a combo of 401k and IRAs. We already have a solid cash emergency fund, as well as mutual funds, and are putting extra to the house vs contributing to these at the moment. Our monthly expenses are set up on the envelope system, where our cash budget goes into an envelope for every expense with every paycheck. Our biggest weakness is spur of the moment spending, this should help stem it. If we don't have the money for it, we don't buy it. Envelope amounts were based on what we have been spending, combined with what we should be spending, so in some cases it was designed to cut down on certain expenditures. Time will tell how well it works, but only using cash definitely makes you think about what you are spending.

[aigel]

I guess I have been lucky - don't have a budget. But 401k comes right out of the pay check and all savings are auto-deposited in relatively small chunks into separate accounts, including college funds. New cars and toys are only bought if there is plenty of cash in savings. If not, well, we wait.

This has worked well, but we've always had decent income and don't spend much on large items like vacations, dinners out, furniture, cars etc. - that's where we always pinch. Of course there are times when the cash in checking doesn't seem to last, then we dial it back a notch. Also NEVER take on debt on anything but mortgage.

So, I guess I do budget in the sense that I take savings off the top and don't touch it.

G

[930addict]

Originally Posted by aigel

I guess I have been lucky - don't have a budget. But 401k comes right out of the pay check and all savings are auto-deposited in relatively small chunks into separate accounts, including college funds. New cars and toys are only bought if there is plenty of cash in savings. If not, well, we wait.

This has worked well, but we've always had decent income and don't spend much on large items like vacations, dinners out, furniture, cars etc. - that's where we always pinch. Of course there are times when the cash in checking doesn't seem to last, then we dial it back a notch. Also NEVER take on debt on anything but mortgage.

So, I guess I do budget in the sense that I take savings off the top and don't touch it.

G

This is kind of what we do. I have a pension and a 457 and my contributions are automatically taken out of my check. My check is auto deposited into our savings account and we only transfer what we need to checking to pay bills. So whatever is left over stays in savings. The only debt we have is our house and my truck is almost paid off. The problem we run into with this method is we don't limit ours spending for things like food and entertainment. We can easily spend $1200 a month on food for a family of 4 and my kids are only 7 and 8 and don't eat much!

[flatbutt]

I manage my budget on a monthly / yearly basis. I track all expenses on an Excel spreadsheet. As I get paid twice a month I divide all repeating expenses by 26. Monthly expenses( mortgage, power , phone etc) go into checking. Yearly expenses like insurance go into my savings account. Then whatever is left over gets distributed into long term savings, investment and lifestyle.

[Hugh R]

My annual PITI is something like 20% of take home. Add in utilities/maintenance and it might be another 15%. One car and one RV payment with insurance for all 3 might be another 5%. So around 40% goes to monthly on-going expenses. I put around 30% into savings/pension maybe more. The rest is whatever, like food eating out, taking the RV out, travel, the wifey remodeling, etc.

[on2wheels52]

I'm not good with budgets.
I've just been stealing out of the till for home monthly expenses
But that deal's gone now that I've sold the shop. It looks like $10k/year is what I've been paying. I've squirreled away enough cash and gold/silver to cover that until I elect to draw social security.
Jim

[ckelly78z]

Originally Posted by 930addict

The problem we run into with this method is we don't limit ours spending for things like food and entertainment. We can easily spend $1200 a month on food for a family of 4 and my kids are only 7 and 8 and don't eat much!

Wow, that's easily twice what we spend on food (about $150 a week) for the 4 of us, 21 year old girl, and 16 year old football player boy.

I have been at 15% (plus 3% company match) in my 401K for a few years now, and investing rather aggressively in that has given me around a 30% return every year for the last 5 years, so the amount has grown astronomically. I love listening to the success stories on Dave Ramsey's show, I think more people should do his course and learn to live frugly.

Along with the large 401K, I have a company pension and we paid the house off 2 years ago, so retiremnet in about 10 years is not a souce of concern, rather it is something I look forward to greatly.

We drive older used cars, wear non-designer clothes, have older furniture and appliances, and heat almost exclusively with wood from my own property. This sort of frugality has allowed me to help both kids with college, cars, and build my wife a huge horse barn /indoor riding arena.

I'm not quite sure what the OP meant by committing 30% to "lifestyle" ??

[Crowbob]

Auto pay for all utilities, insurance and tractor loan. Debit card for groceries. EVERYTHING else cash only. I carry no balance on credit cards, no mortgage and usually have $20-30 in my wallet.

[GH85Carrera]

Well of course the ideal budget is to just make way more than you spend!

[VincentVega]

Some good ideas in this book, Financially Fearless: The LearnVest Program for Taking Control of Your Money

The basics boil down to...

A. Yes, I’m a big believer in the 50/20/30 budgeting method. Once you’ve taken care of your Essentials (50% of your take-home pay) and your Future (20% of your take-home pay), the remaining 30% is yours to enjoy. Personally, the things that I value highly include gifts for others, travel, exercise—and fresh flowers (which are relatively inexpensive given the happiness they provide me!)

[Z-man]

Most financial experts and institutions state that housing costs should be 30% of your total budget. Housing costs include mortgage, utilities, home owner's insurance, property taxes, home improvement costs, and any HOA fees / condo fees.

Here is the plan I have based my budget on:

Starting with your gross income.
10% for charity / tithing
14% for tax

That leaves you with 76% net spendable from your gross income. That is split thusly:
29% - housing expenses, including mortgage, property tax, and utilities
11% - food
13% - auto
5% - insurance
5% - to pay off any debt (other than home mortgage)
8% - entertainment / recreation
7% - clothing
5% - savings
4% - medical / dental
5% - investments
8% - miscellaneous (children activities, buffer for emergencies...etc)

I based my budget on the budget guidelines of a conservative financial expert, Larry Burkett. Lots of good financial tools can be found on his website: http://www.crown.org/

Mrs. Z and I sold our home last year, and we are looking to purchase a home this year. I have a spreadsheet that I have been using to determine how much of my budget would be spent on any home we are looking at. I plug in the estimated price of the home, property taxes, estimated utilities, mortgage rate, and down payment to determine what my monthly payments would be. Then I input that number against the rest of my budget to see what PCT of my total income would go to housing. This exercise helps me determine if a given house is within my budget or not.

-Z

[Seahawk]

Z Man is right on the money. The tried and true percentages of income put toward household budget items has been the same for a long time.

The numbers can and do change based on many factors (our savings and investment rates are higher since the kids are gone and financially independent, for example), but Z-Man's list is an appropriate set of benchmarks.

The key is following the guidelines!

Good luck.

[LeeH]

Trick is to find what works for you and your family. I'm not a fan of arbitrary limits so we use a "seat of the pants" approach.

We don't budget, but do track every penny in Quicken. My wife has the salary and benefits while I'm self employed. Big chunk of her salary goes to 401K + we have the health savings maxed out. Her withholding is set to single rate with no dependents so basically my taxes are paid via her check. We have an automatic transfer from checking to savings on her payday. This savings account is for vacations, car purchase, repairs, etc. So most of the big stuff is covered by the time what's left hits checking. Sometimes that balance goes up or down depending on a variety of factors. If the checking balance gets too high, I'll transfer some to savings. As long as our checking balance overall trend is level or moving up, I figure we're doing ok.

[uncle_scott]

I just plugged all of my known fixed expenses into Z-man's percentages and it doesn't quite add up for my wife and I. Our housing is closer to 33% while our auto is about 8%. We don't spend anywhere near 7% on clothing, and our medical costs are about 1% due to having a local government job with good benefits. Savings rates into our 401k are around 9% collectively with match, and we put a little money aside for vacations and small fun purchases.

The thing that kills our budget is the student loan payments we are making. Between both of our Undergrad and my Grad School we spend 15% on that debt service alone. We are using the Dave Ramsey snowball method to lump all payments onto those student loans and get them paid off in 5 years from right now. That will be a significant savings to our budget, and I imagine that we will be greatly increasing our 401k allocations at that point. I will be 35, so I will still have some time to catch up.

It is an interesting shell game. This has been a good exercise for me to look at our funds more closely.

[930addict]

Originally Posted by ckelly78z

...I'm not quite sure what the OP meant by committing 30% to "lifestyle" ??

Lifestyle refers to things like gym memberships, clubs, entertainment - that sort of thing.

More on the 50/20/30 budget method is here