How to Build a Budget (allow for fun / fur)

The word budget literally gives me hives… someone (or worse – me) trying to impose some sort of restriction on my fun? No gracias… I would rather not.

But after going through the process of calculating my net worth, determining that I was definitely in the red (not the sparkly pink of positivity), examining my monthly expenses relative to my income and facing the harsh reality of my credit card debt (all of which was definitely high, high interest), I had to bite the budget bullet.

Taking the time to look closely at where your money is going is key to building a budget that works for you. There is no point in setting yourself an unattainable goal by saying that everything you earn is going straight to pay off your credit cards or other debt… because the reality is – you still have to pay your rent/mortgage, you still have to eat, you still have to get to work, and you still have to have some fun (I’m not a monster).

We have already gone through the initial steps of building a budget –

  1. Calculate your net worthtake stock of your assets and liabilities
  2. Review of your monthly spending, including required expenses, minimum debt repayment and fun money
  3. Determine the priority of repayment of high interest debt

Personally, I would consider any annual interest rate over 7% to be high interest debt… so you may even want to think about including any high interest student loans in this determination.

If you don’t have high interest debt to repay, you can prioritize savings over debt repayment. I will be doing a whole series on savings and making your money work for you but in the meantime, the general best practice for savings is to ensure that you have six to twelve months of expenses tucked away – as an emergency fund. Some people estimate that you only need three to six months but I feel like we should err on the side of caution on this front.

If you do have high interest debt to repay, the focus – after paying your monthly expenses – will be paying off that debt as fast as possible. While there are some ways to stop the bleed of high interest debt all together, let’s just focus on paying that debt down FAST.

Now that you have a clear idea of what you have (or don’t have), what you earn, what you owe and how you should prioritize repayment, what should these numbers look like?

Many budgeting experts organize spending in the following way:

Expense

Percentage of after-tax income

The Needs: Required expenses (housing, minimum debt repayment, utilities, minimum grocery spend)

50%-60%

The Wants: Expenses (daily spending, coffee, entertainment, restaurants, travel, shopping, etc.)

20%-30%

Financial Goals: Accelerated debt repayment and/or savings

10%-30%

In examining my own expenses (Needs and Wants, along with the financial goal of paying off all of my debt within one year), I realized that my living expenses (rent and utilities) were way beyond the 60% of my monthly after-tax income. Even though I loved my apartment and loved living alone, I found a fabulous apartment and a great roommate – saving myself $1225 per month in my Needs category. That sort of cut is not always achievable in every situation but there are lots of ways to cut corners when it comes to your Needs – are you paying too much rent? are you paying too much for electricity, gas, water? are your groceries overpriced (could you be shopping at cheaper grocery stores)?

In examining the Wants expenses, I realized that my lunch/coffee spend at work was out of this world –bringing coffee and my lunch (or picking up a cheap salad at the grocery store) was a much better option. I was taking way too many Ubers and taxis while also buying a monthly travel card that wasn’t getting enough use to justify the expense. The Wants category is probably the easiest to cut down… because by definition, they are not required expenses… these are the lifestyle expenditures.

BUT WAIT – CUTTING DOWN THE LIFESTYLE EXPENDITURES?!?!?! OH. HELL. NO.

Before you table flip and storm off into the internet looking for “get rich quick” options (which are all scams – let me save you the trouble)…I still managed to have fun (and buy a white fox fur hat)! And pay off all of my debt (and there was a lot of it)! All in one year!

I was able to cut down my Needs and Wants expenses without having to give up my fun weekends away, traveling around Europe and going out with friends – all in a budget-friendly way… the dream. So yes, I cut back in some areas of my spending but it wasn’t the end of all the fun. I got my Needs/Wants expenses to 60% of my after-tax income, leaving me 40% to go towards aggressive debt repayment (high to low interest rate prioritization). Every month, with the money I had left over, I took a huge chunk out of the remaining balance of the high interest debt – every month, for twelve months.

Building a budget is not a set it and forget it way of living – you can automate things by dividing the money up into separate accounts allocated for different purposes of course but you must keep an eye on your spending. Tracking your spending on a regular basis is a key to successfully managing your money and achieving your financial goals.

There are tons of great budgeting apps out there that can help you with this. Once you have an idea what you should be spending on your different categories of expenses (which you can obviously expand beyond Needs and Wants), a budgeting app is a quick and easy way to monitor and follow your budget every day. Reviews of those apps are in progress – stay tuned.

Happy budgeting!

Sincerely yours in harmonious fun, fur and fiscal responsibility,

Rachel

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