I created my first budget about ten years ago from a template I found in Dave Ramsey‘s book The Total Money Makeover, and after years of practice, it’s become habit for me to make a new budget every month. I get asked on a regular basis to help people set up their budgets. I’ve been able to sit with a few friends, but time and distance prohibit me from helping individually every person who asks. Every household is different, so every budget needs to be different, too. Also, it’s important for me to say here that I am not a financial planner or adviser, and that everyone needs to be accountable for making informed choices about their own money. That said, since it can sometimes be helpful to get an idea of what other people are spending on and saving for, we have decided to share our budget. I’m showing where our money goes as a percentage of our take-home pay, both to maintain some privacy and also because it’s more practical: Regardless of the dollar amounts, it’s a good idea to try and save some money each month, meet your basic needs, have a little fun if you can afford to, and return something, however small, to the communities and organizations you care about.
Here’s how it breaks down this month for us:
- Giving 3%. This category is on the small side this month. Not being religious, we don’t tithe, and we only have one gift-giving occasion in January. The balance of this category will go into donation boxes of non-profit institutions we visit this month. We also make an effort to contribute to charitable organizations and relief efforts throughout the year, and volunteer some time to causes we support.
- Emergency Fund 10%. Our Emergency Fund is currently big enough for us to survive for about four months with no other income. While that felt comfortable for us when we had one spouse with a full-time job, and one with several part-time and freelance income streams, now that we are down (for the time being) to one partner with one full-time job and a very little bit of part-time work, we are working toward having a year’s worth of expenses set aside for emergencies. By my calculations, at the rate we are able to save, it would take us about six years to reach that number! Because we anticipate returning to our 2+ income status in a couple of years (thereby returning to a smaller Emergency Fund), we’ll probably never hit our temporary goal, but we’re aiming to set aside 10% of everything we bring home in the meantime.
- Tax & Insurance Fund 10%. We maintain a separate account where we amortize our annual term life and auto insurance premiums, and set aside money to pay taxes on any 1099 income.
- Mortgage 25%. Our only debt is this 30-year fixed-rate loan, and we made a 20% down payment to avoid PMI. If we don’t pay anything extra, the payment (including principle and interest as well as escrow for property tax and insurance) is a quarter of our current take-home pay. We REALLY wanted a 15-year mortgage, but if we had done that, our currently reduced income would be more of a crisis than an inconvenience, so I guess we made the choice that was better for us. Still, we’re planning to get it paid off just as soon as we can.
- Utilities 3%. This includes electric, water, natural gas, sewer and trash pickup. We are constantly looking for ways to reduce our usage, and hope to continue to see this number go down.
- Mobile phones 3%. Our mobile phones are recent-release smart phones with high-usage packages. Admittedly an indulgence, we switched providers last year to save about $250/year over what we used to pay, and this expense would be the second cut we made in a financial crisis (the first is coming up below).
- Home Improvement 2%. The Home Improvement Fund is one of the last budget categories we pay into right now. We are making continuous minor improvements at the Little Hippie House, and hoping to save enough to replace the aging roof, remodel the bathroom & kitchen, tear down a load-bearing wall, and install new floors. That all could take quite a while, but we’ll keep chipping away at it, as our finances allow.
- Cable/Internet 2%. Cable would be the first thing to go in the event of a financial crisis, and I suppose our internet would have to slow down a lot if things got tight (or maybe not: Google Fiber is slowly making its way into our neighborhood). But it’s another indulgence we’re comfortable with for now.
- Transportation 1%. Our transportation expenses will be ridiculously low this month, in part to one of us being a stay-at-home spouse, and the other one working just a few miles from home. Having paid-for cars that won’t need servicing, inspections, or registration in January helps a lot, too! (Remember, though, that our car insurance falls into another category… this number would double if we included it here)
- Food 11%. Food is the big budgetary challenge for us this month, but we’re determined to make it work. When our income is bigger, we normally spend about double what we’ve allotted for January! This month, we’re planning to minimize meals out, work our way through the frozen holiday leftovers, and take advantage of our upcoming small winter garden harvest. In addition to feeding ourselves this month, it’s my hope to use 5-10% of our weekly food budget to build our home food store… I really love going to our little chest freezer for a gallon of milk or to our garage for a jar of peanut butter instead of having to run to the market when things run out!
- Pet Care 1%. This category this month consists entirely of canned food for our two cats. We have more than enough kitty litter and dry food to get through the month, and their annual veterinary visits aren’t until March.
- Clothing 2%. We aren’t planning any clothing purchases this month, but we’re setting a little aside so we can do a Big Shop in the Spring.
- Entertainment 3%. Entertainment is the one area where we consistently underspend! Every month, it’s a challenge to get ourselves out to the movies, a play, or to hear some live music. We’re still working on that, for the sake of balance.
- Personal Care 9%. Our Personal Care budget should really be called “MY Personal Care budget,” as Mr.Vega gets an inexpensive haircut every other month or so, and is in the process of growing an Epic Beard, so we no longer buy him razors or shaving cream. Because I’m in the process of Changing Looks, hairwise, this month, this category is more than double what it usually is.
- Education 6%. Even community college costs something, at least for now: there are a lot of political promises being made on the campaign trail to change that. That will be lovely if it happens, but in the meantime about 6% of January’s pay will go for tuition.
- Vacation 7%. Last summer, we went to a five-day music & arts festival that we just loved. It’s time to buy tickets for the next one, and because it’s an out-of-town camping trip, we count the tickets as a travel expense, rather than “entertainment” (and this part is a little weird, but because the event is limited-capacity, tickets are sold lottery-style, with each person allowed to request a maximum of two tickets. We each put in for two, and if we get all four, we’ll sell the extra pair at face value and recoup half of our expense. But we’re sending payment for four tickets in January, so that is what we have to budget for).
- Professional Development 2%. My new job will reimburse me for this training after I complete it this Spring, but registration is first-come-first serve, which is why I’ll be paying for it this month.
So there you have it: our January budget, with every dollar accounted for. There’s plenty of room for improvement, but we’re not unhappy with it. Feel free to share in the comments how different it is from (or similar to) yours… I’m always curious to learn how other people are doing it.
The apartment complex that we lived in for our first year in Austin experienced a fire the other day, and lost a whole building. 24 units. Thankfully, no one was hurt, but about sixty people lost everything they owned, and thirty of them are still displaced, just in time for the holidays. Not everyone lost their homes in the fire: the rest of them had everything they owned destroyed by smoke, sprinklers, and firefighting efforts. We only moved out of there five months ago, so we know that complex requires tenants to carry $100K rental insurance policies, but that wasn’t a hard sell for us: we are big believers in maintaining insurance.
Our renter’s insurance policy, when we had one, cost us $363 annually, or a little more than $30 per month. We have come to view insurance as an inextricable cost of whatever we’re insuring: If we can’t afford to insure a car, for example, then we believe we can’t afford the car at all. Around here, health insurance comes before restaurant meals and entertainment, life insurance takes priority over gifts or travel for family visits, and homeowners insurance gets paid before we buy things for the house. Because before we get anything new, we want to make sure that an accident or illness wouldn’t cause us to lose what we’ve already worked so hard to achieve.
It’s not easy to watch our hard-earned money vanish into the ether every time we make an insurance payment. We’d much rather get a newer car, or at least get the ones we have detailed, than pay for insurance we hope we’ll never use. The amount of the annual checks we send for our term life insurance policies could pay for a weeklong tropical vacation every single year (The longer you wait to buy it, the more it costs. And you’ll never be any younger than you are today). And we would each be sporting pretty stylish wardrobes if we chose not to spring for our own “affordable”health care coverage each month.
But here’s the thing: If we were to drive without car insurance, say, we would be subjecting ourselves to hefty fines (in the neighborhood of a year’s worth of full coverage) just for failing to produce evidence of insurance at any routine traffic stop. An accident that totalled one of our cars would leave us without the transportation that is an integral part of our ability to earn money and be self-supporting. And in the event that we found ourselves damaging someone else’s vehicle or causing them bodily injury, we could be sued for damages, and lose everything we have. Similar or worse scenarios play out when one considers forgoing health insurance, renters or homeowners insurance, and life insurance. One moment of distraction, once suspicious lump, or in the case of the apartment fire, one cigarette on someone else’s balcony that isn’t fully extinguished, and any one of us, without insurance, is looking at total financial ruin. So, we’re willing to shell out some money to protect ourselves from those potential outcomes, even when it means giving up on some of the other things we want.
Insurance isn’t sexy or fun. But if something bad happens and you’re uninsured, it could be years, even decades before you (or your survivors) are in a position to do anything sexy or fun at all. So before you leave your uninsured home to put your uninsured body into your uninsured car and drive to the mall to spend the $830 that the average American will spend on Christmas this year, consider spending some of that cash on covering your assets. Because however little you think you have, it is guaranteed to cost a lot more than you imagine if you were to lose it all.
Last week, we got word from my sister-in-law that my husband’s mother had taken ill, and needed to be hospitalized. She’s home now, and on the mend, thank goodness, but we were naturally on high alert, preparing for the possibility of traveling the thousand miles that separate us from her. We’ve got a decent number of airline miles that we’ve accumulated for use in the event of an emergency requiring last-minute travel in the continental United States (we’d have to use our Emergency Fund to get to our loved ones in Hawaii, if the need arose), and that got us thinking about what other non-cash resources could get us through an emergency or hard times.
Years ago, I read an article by personal finance writer Liz Weston called “The Emergency Fund You can Eat.” In it, she wrote of maintaining a fully stocked pantry and kitchen as a first-line defense in the event of a financial crisis. Picking up an extra item or two with each visit to the grocery store may be easier for some people than trying to pile up a month’s or more worth of cash, but might ultimately yield the same results: if the money stops coming in for a time, a person or family wouldn’t go hungry while they sorted out their next steps. Bonus points for keeping a garden, no matter how small. This particular strategy has come in handy for us countless times: when we’ve been too sick (or too busy!) to get to the grocery store, during the gap between starting a new job and receiving our first pay, and since we moved to Austin, during the occasional Severe Weather Alert, when it’s safest to stay off the roads.
Savings can take on many forms, and one of the ways we’re ready for emergencies is that we’ve saved up some of our paid sick days and vacation time at work. Well, Mr. Vega has, anyway… Being new at my full-time job, I have yet to accumulate much paid time off, but it’s my intention to get and keep a couple of weeks’ worth banked to use if an emergency should arise. Not everyone has this option at work, but some places will let you swap shifts or cover for each other. Helping co-workers out when you are able can also act as a sort of Rainy Day Fund: even if it won’t replace your lost income, having people willing to cover for you can save your job when you have to miss work.
To that end, maintaining good health is another crucial component of a cashless Emergency Fund. Cooking up some of that healthy pantry and garden food, staying hydrated, sleeping well, and getting regular exercise can not only prevent missed work days and lower medical expenses, but it can also provide the ability to physically respond to crisis. It’s easier to handle the loss of a car for a person who is in good enough shape to ride a bike to work, or walk to and from a bus stop. Someone who finds themselves unable to afford their rent is also likely unable to hire movers; having spent some time slinging weights around will make a DIY move much less painful. And healthy bodies stand a better chance of thriving should the need arise to care for an ailing loved one, or to take a second job to make ends meet.
Sometimes it is nice to be able to rely on plastic when times get tough, and that’s when we reach into our wallets for our library cards. I went a year without internet service when I was paying off debt, with the help of free library wi-fi. When I was finished with my work, I’d head over to the easy chairs and spend a little time enjoying current issues of magazines that would have cost me $5 each to buy. I’d leave with an armful of borrowed books, CDs and DVDs that provided a sense of abundance in addition to the information and entertainment I got from them. Most big-city libraries also provide classes in financial and computer literacy, job search help, storytimes for children (it’s not child care, but just letting someone else read to the kids for half an hour can be a real sanity-saver for stressed-out parents), movie screenings (sometimes with popcorn!), and here in Austin, the public libraries even host monthly Adult Craft Nights! And all of it is free.
Finding money to deposit into an Emergency Fund is difficult, and even when we have the money, it’s not always pleasant. But investing in supportive relationships is a fun way to create a strong safety net for ourselves. Healthy friendships and familial relationships lessen the risk of depression and reduce the length of unemployment. If we remember to stay in touch with and enjoy the people we love when things are going well, then in hard times, those same friends and family will be there so to help each other move, provide care and companionship during illness or after an injury, or even prevent homelessness. While none of us like to imagine it, we wouldn’t hesitate to do the same for them, and it’s important to remember that accepting and receiving help when we need it also provides the giver with a sense of meaning and importance in their own lives. And being part of a robust social network makes us more resilient, so our difficulties are likely to pass more quickly than if we were trying to handle them all alone.
Getting some money in the bank to rely on in an emergency is ideal, but there are also plenty of other ways to prepare for crisis ahead of time. What are some of the ways you’ve found to be ready for whatever life throws at you?