Your Money_ The Missing Manual - J. D. Roth [20]
This section will show you some simple yet effective budget frameworks you can adapt to suit your life. Some of them have as few as three categories. You can't get much simpler than that, now can you?
Your Money And Your Life: Budgeting Your Way to Success
In 2005, Jason was living paycheck to paycheck when his wife gave birth to their second child. Jason realized that unless he started saving, he wouldn't be able to afford clothes for his kids, let alone send them to college. So he decided to do something about it.
Jason had tried budgeting before, but without success. The systems he used were too complex and they felt restrictive. "I tried to account for every nickel, every dime," he says. "That didn't work for me. I always gave up after a day or two."
Then he had his aha! moment. "One day I sat down and made a spreadsheet," he says. "My wife and I earned a certain amount of money, and we decided that was all we were going to spend. I took my bank statement and put the numbers into the computer. I just made the simplest budget I could: income, fixed expenses, and whatever was left over. Nothing fancy. The first few months of budgeting were hit-and-miss, but that was okay. I made adjustments and Iearned to set priorities. I learned from my mistakes. After a few months, the budget was liberating."
Jason started with a basic budget and added complexity with time. Eventually he was able to pay off over $11,000 in debt and break the cycle of paycheck-to-paycheck living. Today he still uses a budget—but now he only has to fuss with it once a year.
Jason now runs a blog called No Credit Needed (www.ncnblog.com), where he helps others tackle their debt and spending issues. He tells his readers that keeping a budget was central to overcoming his financial problems.
"If you had told me 5 years ago that today I'd be debt free, my retirement accounts would be fully funded, and I'd have plenty of money to live on, I would have thought you were crazy," he says. "But all of these things are true. And it's because my budget helped me paint a picture of my spending."
Simple Budget Frameworks
Many budgets fail because they're too complex. When something is difficult, it can become a chore, and if it's a chore, you're not going to stick with it. Your first budget should guide your spending in broad ways rather than determining how you spend every single penny.
The key is to start simple. Don't begin by tracking 50 spending categories—you'll get overwhelmed. Instead, try starting with 10 categories, or five, or even just two. Simple budgets provide a general framework for spending. This may sound a little sloppy, but loose budgeting is actually surprisingly powerful.
In The Only Investment Guide You'll Ever Need (Harvest Books, 2005), Andrew Tobias offers the following simple yet effective budget: Destroy all your credit cards; invest 20% of all that you earn and never touch it; live on the remaining 80%, no matter what. Although Tobias is being glib, budgeting really can be that easy if you're disciplined. If you follow his three steps—and you start early enough—you can become rich.
In All Your Worth (Free Press, 2005), Elizabeth Warren and Amelia Tyagi propose a budgeting method similar to Tobias's, though they're less tongue-in-cheek than he is. The authors argue that, in order to succeed financially, you need to balance three broad areas of your finances. They say to divide your monthly net income (that's after-tax income—what you actually take home each paycheck) as follows:
Figure 3-1. The Balanced Money Formula
Allocate no more than 50% to needs, including housing, transportation, groceries, insurance, and a basic wardrobe.
Spend up to 30% on wants like cable TV, clothing beyond the basics, dining out, concert tickets, comic books, knitting supplies, and so on.
Set aside