Your Money_ The Missing Manual - J. D. Roth [22]
Save for specific goals. Maybe you plan to visit your aunt in Cleveland next year, and want to save $1,200 for the trip. Add a category to your budget so you'll save $100 per month toward this goal.
Tip
As you'll learn in Chapter 7, targeted savings accounts (Targeted Savings Accounts) are a great way to manage your saving priorities. Whatever you're saving for, open a different account for each goal.
It's up to you how detailed to make your budget. To get started, take one of the budget frameworks from earlier in this chapter, like the Balanced Money Formula, and break each of the broad categories into three to five more specific categories.
Let's say, for example, that your family's take-home pay totals $4,000 per month. You'd use this number to construct your budget. (Always budget with only your actual income; don't include bonuses or raises you've been promised.) Based on this hypothetical income, you might split the Balanced Money Formula into the following categories:
Table 3-1. Sample Balanced Money Formula Budget
Needs: 50%, or $2,000
Wants: 30%, or $1,200
Savings: 20%, or $800
Rent: $800
Entertainment: $400
Credit card payments: $300
Utilities: $150
Dining out: $300
Your retirement savings: $200
Transportation: $300
Clothes and grooming: $200
Your spouse's retirement savings: $200
Insurance: $150
Miscellaneous: $150
Your kid's college fund: $100
Groceries: $500
Charitable giving: $150
Health care: $100
These numbers are targets. Every month, do your best to stay within the goals you set, but be willing to make course corrections based on your actual habits. For instance, if your family struggles to keep your dining out expenses under $300, you might bump your target spending in that category to $400 and drop your entertainment target to $300.
If you really wanted to get more detailed about your spending in a certain category, you could break things down further. Say you wanted to know where all of your entertainment spending is going. To find out, you might create sub-categories for movies, concerts, and sporting events.
This is just one way to create a more detailed budget; you need to choose a level of detail that's right for you. I recommend starting broad—maybe just using a basic framework for a month or two—and then adding detail as needed. One reason budgets fail is that people try to get too detailed; so start basic, and then add enough structure to meet your needs. The benefit of starting simple and adding complexity—rather than doing the reverse—is that you add only the details you need instead of being overwhelmed with too much noise at the start.
You're more likely to stick to a budget if the categories you track reflect your situation and spending habits, not somebody else's. Make sure your budget reflects your goals and values: If you want to travel, then budget for travel; if you want to donate 10% to your church, then budget for tithing. The next section has more tips for sticking to your budget.
Frequently Asked Question: When Is It Okay Not to Budget?
As valuable as budgets are, not everyone needs one. Some people have mastered their finances, and others have a clear idea of where their money is going. Here are some situations where you may not need to budget:
You have a huge surplus: Your income is far greater than your expenses and you have a large cash cushion in the bank.
You're meeting all your financial goals: You have an emergency fund, are saving for retirement, and are meeting your other targets.
You have no consumer debt: You don't carry balances on your credit cards and you don't have a car loan; your only debt is your mortgage and you can afford the payments.
You don't worry about money: You never feel stressed about your financial situation, fight with your partner about spending, or wonder how you're