Hello all, I hope you had a wonderful Christmas. I certainly did, I received most of the gifts I asked for and a majority of them are gifts that make my life better and not clutter it up. I asked for a ceramic coffee mill and some tools, both of which I received from my family. These gifts are useful to me because I enjoy fresh delicious coffee in the morning and I like to do my own car repairs, so the tools are really handy. I also for the first time did not receive any clothes! I am a big proponent of keeping wardrobes simple and efficient by getting rid of clothes I never use after a year. But enough of that! There will be more on decluttering and efficient living down the road. Today, we talk for the second time about budgets and living.
I would like to bring my thoughts back to living simply through a budget and also trying to minimize the “cost of running our business” – aka the family. I talked before about having a budget and breaking it down between items that are necessary and items that can be reduced. Necessary things in a budget would be a rent/mortgage payment, health insurance, car insurance, home insurance, savings, future payments for cars or other big ticket items, utilities, etc. These items are things I like to set in stone right away, and then build the remaining budget with discretionary items, which are items I like to try to reduce.
To start, first take a look at your income. I am going to do all of my budget calculations with a $50,000 sample income. This is a good example income for a below average American two earner household or an above average individual American income. Other income amounts can be used too, but I want to keep this budget as realistic as possible. Substitute in your own income and adjust accordingly. As you will see, the total income does not matter, since we are going to exercise our budget in terms of percentage spent on each category.
Take that sample $50k income and look at your take home income, or “after tax” income. This is the money you earn each week, bi-weekly or monthly. Regardless of your payment schedule, take that after tax income and equate it out to what you would make in one month. In my example, the person making $50k would take home $3000/month, or make $36,000 a year take home after tax. Note: depending on your household and filing status, most people will receive a partial tax refund for “overpaying” each month. We can talk about taxes another day. For now, just remember that our example is making $3000/month to budget for. Any tax refund is then extra money to be used for other purposed come June the following year.
Our example income earner makes $3000 per month to budget for. Let’s look at this person’s mandatory expenses they must budget for each month. Say for our person, they have one car with a car payment, a small rental apartment, insurance for the apartment and car, utilities to pay for at the home and their employer has an 401k retirement matching program. Their employer also has a health care sharing program through the company. Also, don’t forgot those student loans!
These mandatory expenses work out to be:
- Health insurance at work = $100
- 401k Retirement plan at work: 3% of yearly salary = $125
- Rent = $1200
- Car payment = $200
- Rental/car insurance bundle = $145
- Utilities (electric, water, heating) = $200
- Student Loans = $400
Total: $2370/mo in mandatory expenses
Remaining budget: $630! Wow look how fast basic American living can destroy a budget and how mandatory spending can account for about 80% of a person’s income.
As you take a look at the above breakdown, can you find any ways to reduce the budget? I can. The person can reduce or eliminate their car payment by saving for and driving a car older than 6 years old. Even if they had to take out a car loan for the car, it would be significantly cheaper to have a lower payment on a less expensive car. Plus, the cheaper, used car would also have less of an insurance burden, which would lower the car insurance cost.
A big stickler with my own household is utilities. Note the $200 per month utility bill. Note how I also did not include cable TV and internet connection as a utility. I do not believe these are utilities, as they are still a luxury in my book (that is notwithstanding I still purchase both of these in my own home). In my own house, I try my hardest to lower the utility burden. This can be as simple as buying LED light bulbs and replacing every incandescent (old fashioned) or florescent (spiral type) bulbs. The incandescent bulbs use 90% of their energy as waste heat and the florescent bulbs use 30% of their energy as waste heat (plus they have mercury inside them which is toxic if the bulb breaks). LED bulbs only use 10% of the former in energy usage which will drastically cut the electricity bill. Utilities can further be reduced by turning off lights and appliances, and even turning down the heat in the winter (up for AC in the summer). My utilities range from $145 in the winter (oil heat cost) to $75 in the summer, all by me and my wife trying the most to follow these simple steps.
By driving an older car and lowering the car payment, in addition to being smart with home utilities, you can save up to $167 per month. That extra $167 can easily pay for an average cable TV/internet bundle and a $40/month smart phone plan. Conversely, you can add even a $100 from your new savings to your company 401k plan each month and save 5.4% of your income instead of 3%. Together with the 3% 401k company match, you will be saving 8.4% a year-which is an excellent way to manage your money (and probably a better rate of savings than most people).
I hope you enjoyed the simple breakdown of “mandatory spending” in budget planning. Soon, I will tackle the more fluid “discretionary spending” part of the budget – where we will discuss the usage of the remaining $630 left per month. We will also run a scenario with the more cost conscious mandatory spending I proposed earlier and add that savings to our discretionary spending.