Reduce Debt Increase Wealth

Budgeting Categories

July 24, 2022 MIsterchuck Season 3 Episode 123
Reduce Debt Increase Wealth
Budgeting Categories
Show Notes Transcript

In a perfect world these would be determined before buying or renting a place to live. This is not possible in most cases what should be the percentages of income in each category and why this is important in keeping a personal budget. What categories that need to be in a budget and how to group. 

Article Links: 

 https://www.budgetsmadeeasy.com/household-budget-percentages/ By Ashley Patrick

 https://moneyfit.org/how-to-budget?gclid=EAIaIQobChMI3pmu3OHw9wIVegaICR3GTwPXEAAYAiAAEgI1yPD_BwE 


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Charles McDonald:

Hello, I'm your host, Mr. Chuck, I retired accountant turn truck driver, I reduce my debt in a relatively short period of time, debt reduction to achieve financial freedom takes commitment, confidence, determination. Budgeting categories with percentages. In a perfect world, these would be determined before buying or renting a place to live, for that matter before doing anything in your life. Since this is not possible, in most cases, what should be the percentages of income in each category? And why this is important in keeping a personal budget, what categories that need to be in the budget and how to group I got two show notes. I have two articles in my show notes that you can link to. And the first one is money fit.org. And it talks about budgeting. And why do you need a budget we're going to talk about the myths and realities about household budgeting. There are a number of reasons why many of us do not rate or live by a budget. Many of these reasons are based on false assumptions or myths. The following the following are a few such myths and their corresponding realities that may have helped us overcome our own resistance to budgeting. Myth number one. If I had more money, all my problems would be solved reality. actually spending less than I earn may solve many of my money problems. Myth number two. Budgeting is for people who are in debt. Reality. Budgets are for anyone seeking to stabilize her finances and avoid debt. Myth number three. If I balance my checkbook, that's as good as budgeting reality. The checkbook can't help me prepare for unexpected expenses like car repairs, or doctor visits, budgets Han. And I'm pretty sure very few people ever balanced their checkbook. Myth number four, following a budget inhibits my freedom of choice reality. Following a budget increases the likelihood that I'll take care of my financial priorities first, such as housing, food savings and transportation. If you identify with one or more of the above miss, then make a personal decision to implement the realities and to your thoughts. If you're still having difficulties budgeting, remember this. If you don't control your money, it will control you. If you live within your budget, you will be much more likely to avoid excess debt, build emergency and long term savings account. Take care of financial priorities such as housing, food, and transportation, rather than disapprove corporate spending on entertainment and dining out. Establishing regular investing habits and preparation for retirement. Fill in control of your finances. Understand your personal spending habits and eliminate wasteful expenditures. Be in a position to take advantage of financial opportunities. Whether it's something on sale at the store or a chance to greatly improve your investment portfolio. prevent many arguments spouses have with regards to spending hand finances make more than monthly minimum payments to credit accounts including credit cards, mortgages, and auto loans. So that's the reason why you should have a budget and now the next question is what categories do you need to have in your budget? If you follow my podcast, you know that I do the tracking is important if you do tracking using software, such as the one I use, which is Count about.com. It has all the categories in there for you which makes it much easier, you just have to be consistent with when you are applying the categories that you apply them consistent month in and month out that the same expenditure is getting into this same category. Or I will be just giving you bad information. So what are the categories you should include? If you want to be lazy, everything you spend money on, can be placed into a category. How you do that is up to you. But again, you must be consistent on that placement. First start with needs, needs are things they have to pay every month no matter what, whether you're working every day, or vacationing every day, you're gonna have expenses, that things you pay for, that our needs, needs our house, housing, transportation, food, that's the three basic needs. That's the three things, no matter what you do in your life, you're gonna pay for on a regular basis, month in and month out. Now you can claim there's some other needs in there, maybe insurance is a need, maybe health care is a need. But you can go without that, if you absolutely had to, you have to have a place to live, you have to have food to eat, and you need transportation to get to and from work or to and from a grocery store. The other need that you should be thinking about is savings, savings for your retirement savings for your emergency fund. That is also a need that you should be including. So let's now break down those categories. Those needs housing is overall category. Within housing, you're gonna have rent, or mortgage payment, that's one item, you're gonna have insurance, you're gonna have utilities, you're gonna have maintenance, and you're going to have taxes. And everything related to your home, your house, the building, and our property that you pay for is included within this category, housing. When you apply percentages to your income, that's a different character. But if you group these together like that, you will have it set up. So that you can then apply percentages the way you need to apply them, if you use count about their categories for housing is already broke down into what I just said, mortgage or rent, utilities. I think utilities is separated. But I included under housing, but it's one number. You can you know, utilities could be gas, natural gas, electric, water and sewer trash, you know, those are all utilities. But when you're applying it, and the percentage to your gross income, it's one number. So in the break out of your tracking, you can look at the detail. But once you get it to the budget, when you're doing a budget, you bring over one number, you know you'll bring over a housing number, you can do that way. And within housing then you can break that out of a a housing as one number. And then under housing, you can have an utilities, and that's another number. And now you're pretty much done. So you have housing is your category with two sub categories. Then when you're tracking program, you might have multiple subcategories. I'm not going to get in a whole lot of detail there but I think you get the picture. The next category is transportation which is similar to housing. You got your loan payment for your automobile. Then you have gas and oil that you were regular be put in a car, and you have maintenance. And those three things are gonna make up your transportation cost. And you also have insurance on the automobile. So those are I mean, I grew up the insurance related to housing, and housing, I grouped the insurance related to transportation, and transportation. And another option on insurance, you can just have a category called insurance. And you can put those down there. But a lot of people have an escrow account. So the insurance and the taxes for their property are in that one monthly payment. So you don't need to break it out. Then you have personal spending. So we now we covered housing, transportation, food, it would be grocery store, dining out fast foods, anything you buy to put in your mouth and eat consume would be food. Utilities would be covered power, water, trash, Internet, and phone. I include that under housing, because 90% of the time most of those items are related to the home, or that building. personal spending is everything else would be hair, nails, decor, massages. Anything else that you may do, that you're you spend money on. Clothing, I believe is a separate category. But clothing could be also included under personal spending. But you might want to break out a subcategory and call it clothing. And you have another set of subcategory called toiletries, everything you use when you bathe or shower. Because I think you're getting the idea, then we have savings, you'd have a category savings for your emergency fund savings for retirement savings for any other goals that you're working towards. Maybe your children's college education, maybe a remodel of your home may be an upgrade of your automobile savings. And then we have entertainment. Entertainment is anything you do for fun, including kids sports and activities, gym memberships, concerts, and vacation. Okay, anything you do so that would also may include streaming TV, or streaming movies, things like that. Your internet service, which is pretty much related to your home should be part of your housing cost. But in order to maximize your internet costs, you should be streaming your TV and not having cable TV stream what your watch and nothing more. That's a tip on how to save money. Health care would be could be your health care insurance that your pay, co pays medication and any other out of pocket expenses that you may have on your health related issues. And then we have insurance other than your home and transportation and maybe your health care because your health care is that if it's already deducted from your payroll, your budget is starting with your net pay your gross pay less taxes, Less 401k Less health care. So you don't have to deduct it again, from your from your budget because it's already out of your pay. And we'll talk more about that later. If you have disability insurance, long term care insurance or any other type of insurance that you have that's not included any other category. And then there's a miscellaneous is for the little things you forgot or don't fit into another category. This can include your buffer for your checking account. your checking account, you should have a buffer where your never goes below a certain dollar amount, whether it's a $300 buffer or a $600 buffer, once you have a savings account, and you exceeded the amount that you need to maintain, so you don't have to pay fees on your checking account, then that buffer can get a little bit lower. But if you have to maintain an A amount in your checking account to avoid those monthly fees, then that should be your buffer. I don't include that in the budget, because it should always be there, you put it in there one time, and it should never go away. So I thought that's not a good example. I'm thinking a lot of miscellaneous could be personal spending. So you need to maybe in your personal spending, come up with some set subcategories clothing, for yourself clothing for your spouse clothing for your children, he has three subcategories for clothing, then you would have maybe personal care items. That would be everything you buy for your personal account. And you can do it in three set categories by person, if you wish, if you can break it out fine. If you don't break it out, that's doesn't really matter. I can't think of anything else that could be miscellaneous even even if you have a one time something for your item will that still be transportation, even if he had a one time repair to your home, and still housing, even if you had a one time repairs to your lawn more. While you could have lawn and garden. If you have a big garden you spend you know for fertilizer for a lawn care service. For lawn tools that you might buy, you could have a lawn and garden category. So it's up to you. It's up to what you're doing and how that you want to break it out. But you should have a category for everything you spend your money on. And this miscellaneous account should be fairly small. So that you can categories as much as possible. So you can consume consistently track where your spending is going, and how much it is and how much it varies from month to month. So that's important. Next up, we're going to talk about percentages. Before I get into percentages of what each category should be, there's one more category is called hobbies that can be under your personal spending. And you can break your category hobbies and you can break subcategories under hobbies for each individual or for each hobby may have. That'd be the only other category that I really didn't cover. My next part is percentages. And it's budget made. easy.com is links in my show notes. And you can refer to it if you wish. So depending on how much you should be spending on each budget category can get confusing and depends on your income. When you break it down by percentages, it can be easier to know if you're overspending on one category. Also, he would know how much your mortgage payment is what percent of your income, and you would know how much you can afford to be spending on a mortgage or how much you should be spending on your monthly rent. Then that's mortgage that's just the principal and interest part of that payment. He should deduct the taxes and insurance if you have an escrow. So let's get down to it. overall budget categories again is housing costs food, transportation, personal spending, utilities is included under housing but you can break that out separately in your tracking program. Giving to charitable savings, entertainment health care insurance. And there's one thing that's not part of this would be your credit card debt should be a another category. So if you have multiple credit cards, they carry a monthly balance on set up a car category and call it credit card debt. All your other debt is gonna be in the car category in which it belongs, your mortgage is in your housing, your car loans are in your transportation. If you have personal loans that you use to repair your car, that loan should be under transportation. If you have a second line of credit, or a housing line of credit, that should be under your housing. And these are recommended household budget percentages. Don't worry, if you don't, are not close to him, if you're under, you're doing good. If you're over, you're probably struggling a little bit, or maybe you're cutting back somewhere else, because maybe you had a goal of living in a certain home, but at the time, your income was a little bit lower. So when you borrowed the mortgage the first time, you may have been over these percentages that you got a couple pay raises, or maybe you refinance, and you can bring it down within these guidelines. So your housing costs, which there this are talking about the mortgage only, or your monthly rent, if you're renting, you're so that should be between 25 to 30%. If it exceeds 43%, you will have a difficult time getting any other new mortgage or refinancing in that particular case, food 10 to 20%, transportation 15 to 20%. Again, that's just the loans you have on the automobiles giving is 10%, insurance three to 5%. That would be the total insurance which would be your homeowners insurance, and would be your transportation, insurance, personal and entertainment 10 to 15%, I would say your entertainment by itself should be around five personal should be between five to 12%. Utilities 5%. Earlier I talked about utilities being part of your home costs. But for this percentage breakout, it should be separate. So when you do your percentages, if you're doing it on your budget, if you have a spreadsheet, you got your budget, you have housing, and you should have subcategories mortgage payment, or all your loans, and then another category utilities. And that's the line you would use to figure out that percentage, health care savings, five to 10%, Health Care three to 5%, and debt five to 15%. And that's debt other than your housing, and transportation. And they're also saying here that miscellaneous should be five to 10. But I think it should be less than 1%. Because if you're doing a good job and getting everything properly categories under personal spending, your miscellaneous should be zero. And then down below that talking about a 5020 30 budget which i i Don't preach that because I don't believe in it. It's supposed to be easier to do. And we need to include housing costs including utilities, insurance and taxes. Like I talked before, food necessity, nothing extra including fast food and eating out. Sir they're saying fast for you to Nene out should be under entertainment most likely. Transportation does include car payment, maintenance, taxes, and insurance and public and from transportation. But you do not need a car payment or a new car. Medical costs including insurance co pays and medication also includes mental health care. Again, if your health insurance is paid through your work, and it's already payroll deducted. You don't have to include your health insurance because it's already out of your paycheck. But if you're gonna use your gross pay to figure these percentages, then your health insurance should be included but it should not be in your budget. So you can just put one line there figure a percentage this so that you know your total insurance, but don't include it as Your budget amount because it's already been paid. I hope that kind of makes sense. You don't want to deduct it ally your net pay twice when you already paid it. And it's already out. But the percentages that you're figuring are based on gross pay, the amount of income you're putting in your budget is based on net pay. Again, net pay is your total pay less taxes, less 401 K or any retirement plan, you may have less any health insurance, he may be paying through your work payroll once includes personal spending, recreation, TV, cable and smartphones, hair, makeup and nails, decorations for every holiday, customized shirts for every holiday. I never did that. Professional pictures for every holiday mama gram, monogrammed anything, everything, which I never get that done, I don't know where they live. I don't want to ever get any customized shirts or any monogrammed anything, I would say that would definitely be a want. And it probably should be under personal spending, probably under clothing. They don't really have a number, the total number for personal spending is five to 10%, which would include your clothing. Again, depending on the season. If you have children that go back to school and you buy a new clothes every fall, it may be he may go over your budget and that month, but then the rest of the year, you may be way under your budget. That's why when I create a budget, it's based on the previous month's spending, and then I fine tune it from that point going forward. If you're just getting started with a bit of a budget, as I have talked about in previous episodes, the first thing you got to do is start tracking your spending and tracking all your income. Then once you get it 30 days in, then that big, set it out categories, you have a program, you print out a from the beginning of the month to the end of the month, a report by category and you total it and you can total it and include subtotals in there too. For all your sub categories, you might want to mess with that a little bit, just get the report that you really want it. And then the next month, here, we're just getting started now. So that first 30 days, you might have gone back, figure it out what you're spending was for those categories, then you create yourself a budget and that would go in your budget comm then in the current month, if you're halfway through the month, you would do a report from the beginning of month to the current day, do the same category report, plug your numbers under actual. Now you can see the difference, you can see where your spending is currently, based on the previous month, as we go through and you start identifying things you note need and can do away with or start reducing your spending in certain categories. Because you identified you were overspending in some areas, then you adjust your budget amount for the following month, and then see how close you can keep it. Again, there's some things you're gonna spend money on that seasonal, and there's some things you're gonna spend your money on, that's every month. So that's a starting point for getting to your budget, I would link to this show now, budget may easy.com. So you can reference these categories and get the percentages so that you know, the proper percentages. And a percent is a good thing to know. And to have you make money. Just make yourself up a chart of what they what the recommended percentages are. And then compare it to your percentages to see how you're doing at a glance. So if you know your housing mortgage should be between 25 to 30%. You do it one month, it's the same every month. If it's 38% there is no a whole lot you can do about it other than to refinance because if you pay extra on them mortgage, your payments gonna stay the same until which point you refinance. And if you're trying to get out of debt, your mortgage should be the last thing that you pay off, even if you want to pay it off, because it's most likely the loan with the lowest rate of interest based on the last 10 years. Now, that's subject to change as we move forward, because interest rates are going up. I'll be back in one moment with my final thoughts. If you want to contact me to request my spreadsheet for the budget, or leave a comment or ask a question, he can send it. Here's my email, reduce debt, increase well@gmail.com. reduce debt, increased wealth is all together no spaces. If you like to ask a question, quick question in the subject. If you'd like to request my monthly budget, put that spreadsheet in the subject matter if you want to leave a response of any kind is put a comment in the subject matter. I will get back to you as soon as possible. Percentages are good to know, he don't have to stick to the percentages as they're published, he should be close to him. But if you exceed it greatly in one category, a lot of times you either gonna be struggling to pay your bills, or you may be making up for it in a different area. So in one category may be a little higher. Another couple categories may be a little lower. A note about the miscellaneous percentage, I think it was five to 10%. If you do a good job on categorizing, and you don't have miscellaneous than that five to 10%, you can add it to your personal spending percentages. Or you can add it to a couple different categories. So you may not be over. You just they're not using a category. So you get that five to 10% that can be used somewhere else. Everybody is different. Everybody spends and tracks things differently. So don't get upset if you're way out of whack. Unless you're one have a whole lot of debt, a whole lot of credit cards, and a whole lot of behind living paycheck to paycheck, and you just can't save any money. And now you need to look where you can reduce your spending