Reduce Debt Increase Wealth

Budget Categories

October 10, 2021 Charles McDonald Season 2 Episode 82
Reduce Debt Increase Wealth
Budget Categories
Show Notes Transcript

What are budget categories, and the percentages should be when determining how much to spend. MisterChuck goes over this information and much more.

Article Links:

 https://www.chime.com/blog/recommended-budget-category-percentages/ By Chonce Maddox

https://www.credit.com/blog/12-top-budget-categories-you-need-in-your-plan/

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Hello, I'm your host, Mr. Chuck, a 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, Budget categories, what category should you be using and your budget and percentages. When I talk about percentages, that's a percent of your income related to that particular expense. So when I say your housing should not exceed 43%, saying that, if you take your income, and you multiply it by 43%, if you go over that dollar amount, you're probably in trouble. Why 43% 43% is the number that creditors are looking at when they are determining whether or not to give you a loan, whether it's a loan for a mortgage, or a line of credit against your home that you already have a mortgage on. Or if you just want to go out and buy a car rather newer use. If your housing cost exceeds 43%, it may be difficult for you to acquire another loan no matter what it's for. Now, let's get back to categories. categories, I've seen people set up every single expanse as a separate category. No. What we're doing here is that category is a grouping of expenses related to that particular category. So let's say housing. Housing is a generally general category, which would include rent if you're reading your mortgage payment, if the mortgage payment does not have the real estate taxes and home insurance, so real estate taxes, and the home insurance would be included under housing, because it's all related to the housing, utilities, whether it's natural gas, electricity, internet, water, and sewer, I can't think of anything else. But that's the majority of all those expenses are grouped under housing, he can group telephone, cable, satellite, furnishing, appliances, lawn and garden maintenance, supplies, improvements, all those expenses related to the home, it would fall under housing. So what you're doing here, we're grouping all that together, we're then getting a total for your housing, and come up with a number. And that number needs to be less than 43% of your income. Now, that would be your gross income, before taxes before your retirement is withdrawn. And before any health insurance is paid out. Now, when a lender is looking at that, they're only gonna look at, they're gonna ask you a couple question, what's your income, how much is your mortgage, and then they're gonna determine that percentage. As long as you're below 43%, they're gonna be happy the closer to it is, the less likely they're going to be wanting to give you the loan. So that's why it's important for a budget. Let's go over some other reasons for a budget. Even if you keep track your V income and expenses, a budget still important thing to have for a couple of reasons. The most obvious reason to make a budget is so you're never caught off guard with more bills than money throughout the month, especially towards the end of the month or right before you get paid. However, even if you're already doing an excellent job of not overspending during the month, keeping a budget can still provide long term data regarding your spending habits. It can serve as a snapshot of your priorities. Not only can this help you plan for even longer term purposes, like retirement, but it can inform you of expenditure truly make you happy and which ones would leave you by the wayside. I don't really agree with all that, but that's what the article said. This is from the article from credit.com 12 top budget categories you need in your plan. And when they say plan, they're talking about a budget. And then number one category is housing expenses, which we already talked about. They're saying number two categories utilities, which we have already included under housing, electricity, water, telephone, natural gas, sewer, trash, Heating, Air conditioning, I don't know why heating and air conditioning because that is powered by either natural gas or electricity, or there may be the referring to repairs of those of your furnace or you AC. Then the number two is transportation. Transportation is everything you spend it be if you have one or two automobiles, you keep track of auto bill number one, auto bill number, auto number two, you're your vehicle payments, your insurance, your fuel repairs, registrations and license and other if anything other falls into that that's not included in the above expenses. And you want to keep track of that by eats automobiles separately. So you can know which one is costing you more money and which one may be should be replaced. The overall percentage for your automobiles should be around 12% of your income. Also, transportation also includes bus taxi train fare, which also includes Lyft, or Uber cost. If you live in a big city, you don't own a home, then the bus, taxi and train fare would be your major transportation cost. If you live out in the country, maybe you don't ever take a taxi, train or bus or Uber maybe occasionally when you need to get home safely. My next category from the article is food which I have as daily living expenses, and our dairy living expenses. That's my overall category. I have groceries, personal supplies, personal applies is like shampoo, soap, things that you buy for your personal self. Clothing as a separate cleaning supplies education lessons. If you have children, maybe they're taking music lessons or something like that. dining in eating out salon, barber pet food, pet related expenses, I call that daily living expenses. And then another category is entertainment. He put yourself on a budget, you don't want to deny yourself too much stuff. So if you include entertainment in your budget, whatever you enjoy doing is what you should put in there. Whether it's hobby, or media, or games, or books, or outdoor recreation, or sports, or maybe gym memberships, stuff like that would go under entertainment. The miscellaneous is any expense that you may have, that's not anywhere else. bank fees, postage gifts, the charitable donation, religious donation, newspaper magazines, dues and memberships. And wherever whatever else falls into that. And I know I hadn't given you percentages. So we're going to go back over that here in a second. I'm going to talk about the percentage of your income related to that particular expense. Now for a lot of you, you already have expenses, maybe you already bought a home. Maybe you already have car payments, stuff like that. So it's the actual money that you're spending is what you need to find out need to do the budget, put in the numbers and figure out what percentage of my income am I spending for that particular category. For those of you that may be this the first episode you listen to, I'm offering a an Excel spreadsheet with all this set up, so the only thing you need to do is plug in some numbers, you put in your budget number, which would be the average of what you're spending. Or if you pay the same amount every month would be the actual amount that you actually spend every month as your budget. Then as you go through the month, you put in your actual numbers, what happened. If you know what it is beforehand, you could put it in an advance, such as your paycheck is always the same, he can put in your paycheck for the week ahead. If you know all the expenses coming up, and they're always the same or close, he can put in your numbers as actual. And you can see if you have the money to pay for everything for that particular period. And then on my spreadsheet also have credit card debt. Why is credit card, it's really I'm calling it credit card debt, but it could be all loans and debt. If you have multiple credit cards, you need to know the balance, the monthly minimum payment, how much you charge for that particular month, which then is your ending balance. And you also should know the rate of interest you're paying. And my spreadsheet, I have all that laid out for you and you can sort them out, do a sort if you know anything about spreadsheets, and rate their highest car interest rate first and down. So now you have an order of which ones you need to pay off first. That's using the avalanche method. All your insurance expense is under the category that it applies to. So homeowners insurance is under housing, auto insurance is under transportation, life insurance would be under daily living or could be under miscellaneous. If your health insurance is being deducted from your paycheck, there's no need to keep track of it. Because you're only entering your income, the amount is deposited into your checking account. So you're not making another payment. for health insurance. If you have another form of insurance, for a health related expenses, then you would need to put that under miscellaneous or daily living expenses. Wherever you feel it should go. I've already talked about housing and the percent of income, it should be applied. I said it should not exceed 43% of your income. That's your gross pay, before taxes and any other deductions, I wanted to just stress that point. But in reality, if you are living in an apartment, and you're looking at purchasing your first home, or upgrading to a home, your mortgage, principal and interest payment for your mortgage should not be more than 30% of your income. It really should be closer to 25%. Because when you add in utilities, and everything else, and insurance, and repairs and maintenance, then that's going to bump that percentage up when you look at that particular category. My spreadsheet does not have any percentages, but you know what I'm going to add it to it. I'm going to put percentage of percent of income in there. And I'm going to apply it to the actual amount. And we're going to come up with a number so you can just glance at it and know what percent of your income is housing, transportation, your credit cards, etc. If you want to do it a different way you can but this is what What I feel works the best that gives you some good information down the road month in and month out, you can have a category and you could call it insurance. And you can put all your different types of insurance in their house, your auto, your sick, say extended care, whatever insurance that you are paying for, you could group it under one category. I like to group it under what it relates to. And that's a personal preference preference. You can do it ever way you want. This article kind of gives you 12 categories. They're saying the 12th is other which is miscellaneous. They're also include daycare, holiday decoration, special occasion alimony payments, anniversary presents, tutoring and private school. I'm calling that miscellaneous that it's not a any one of them is not a big enough item to have its own category. Entertainment couldn't end You can also include vacations under in entertainment you can include your daily coffee from Starbucks or wherever. concert tickets, restaurant dining books can all fall under entertainment, but it could however you want to do it. What they're saying is personal care and hygiene shampoo drove deodorant, toothbrush, toothpaste, gym memberships, shoes, why shoes, I don't know. Why not shoes and clothing, dry cleaning Torah trees, laundry detergent, cleaning supplies, diapers and hate haircare. I just don't know why shoes in there I would include choose under clothing, but whatever. And then they have a core category called debt, which is I'm calling credit card debt is high interest credit cards, vehicle loans, student loans, personal loans and medical bills. I'm putting the car loans under each auto under transportation, and I'm putting the mortgage under housing. So other than those two items, everything else is fine. So it'd be credit cards, student loans, personal loans, medical bills, now they're saying medical bills because medical bills is generally not alone. But you do not have to pay your medical bills with a credit card. So what I always done is pay the provider directly. And if you can't pay the full amount, call him up and set up a payment plan with that particular provider. Now, if you have a lot of medical issues, and you're in the hospital for extended period of time, you may have multiple providers that you're making payments on. And they're you know they work with you. And the good part is they will not charge you interest. So you can make payments, you'll make headway and it will go away a lot faster. And you think if you put it on a credit card, then you have to pay that interest, and it'll take you a lot longer. So I recommend do not pay any medical bills with a credit card. either pay it in cash, or use your debit card and come right out of your checking account. Retirement could be a multiple item. And they have a retirement category. It's an employer sponsored retirement plan. And that would be your share of it would be automatically deducted from your pay. It could be a 401k if you work for for profit, a 403 b which I believe is a non profit, a Roth IRA, which is what you would do on your own a 457 b which I have no clue what that would be. But if you work in that industry, and then if it's a profit or nonprofit, government or non government is these different plans, which are all pretty much the same. Now for retirement, he should be making the minimum contribution of what your employer is gonna match. If they don't match anything he should do at least 1%. The younger you are the sooner you start and the more consistent you are throughout your entire career working or in your tire working life. You will end up retiring with more money and possibly having more money than when you were working. It's not uncommon if you start out with five bucks a pay and increase it to 10 bucks a pay and then $25 a pay Over time, even though you cannot think you afford it, it will grow and compound and be worth a lot more than what you think. And then we have savings, you need to have an emergency fund, you need a health savings account, maybe you have a health savings account through work, you need to say put money aside for vacations. And emergency fund should be three to six months as of your expense. And then saving for whatever whether it's a vehicle college, vacation, wedding, buying a home, or saving up before you have your first child. And we have health care which I don't really budget for it, because I don't know. And it's generally most of is covered by my health insurance. So I can throw that under miscellaneous. So if this article is good, if you want to refer, refer to it, go ahead. It's the credit com 12. Top budget categories, but I've got me see 123456 I got a broken from 12 into six categories. So I don't have a category for insurance, because I'm putting it under each individual category that belongs to it. Same way with debt. If it's a mortgage, it goes housing, if as auto loan goes transportation, then then everything else goes on what I call credit card payments, then we've got daily living expenses, then we have entertainment, and if you can't find any place else to put it goes under miscellaneous. Okay, so your transportation should not exceed 10% 10 to 12% of your gross pay, or this say monthly, your living expenses should be around 5%, your attainment should be around 5%, and miscellaneous should be 5% or less. And your credit cards should be 10 to 15%. And the remainder of everything else should be around your savings account. Put directly in your savings, I don't have a category called savings, because that's going to be under the bank accounts, which then I have my checking account. And then I have emergency fund. And it's the same bank, it's one account, but I got it broken down for my purposes as an emergency fund or auto repairs or use for home improvements. It's one balance one savings account, I'm just breaking it up on how I want to use the money sometime in the future. And then I have a high yield savings, which is it's gonna pay a lot more interest than then at your local bank. The other article that I have is from chime calm, recommend budget categories percentages. And what they're basically talk about in this article is the 50 3020 budget, the chime.com percent percentages to referring to 50% of your income towards living and necessities 30% towards once and 20% towards debt and savings. If you're behind, or if your debt got out or control, your wants needs to go down and your debt needs to go up percentage. And that's what they're really talking about their percentages, I'm giving you our percentages that you should strive for, as you learn more about your particular budget, as you try to save more as you tried to get your debt under control. These are the percentages you should strive for. If you already have a mortgage, and it's 40% of your income is gonna be difficult to reduce that unless you've had it for years. And it's a higher rate of interest. And you can refinance a lesser amount at a lower rate of interest. And you can get it maybe reduced from 40% of your income down to 35%. And if you hadn't done that, you should do it right away. But if it's the other way, if it's 40% of your income, and you have only had the loan a short period of time, say two or three years and you have a low rate of interest, a 3% refinancing to a higher rate entrez is not going to help you because you're not you don't have that money. Have your principal paid down, so you got to hang tight. And that second case, you probably shouldn't be looking for ways to increase your income to help that percentage. So overall on housing, if you're using my spreadsheet, which includes everything, if you try to keep your mortgage, which it should include your mortgage, Principal interest, real estate taxes, insurance, if you can keep that somewhere around 30 to 32%, you'd be doing good. And everything else included in there. Under 40%, your transportation should be somewhere around 12%, that wouldn't include the loans, insurance, and gas and repairs or maintenance costs on all your automobiles. So unless, you know, we're using up a lot of money, and so we're at 40 and 12, that's 52%, credit card debt 20%. So that would give you around 72%. And then the remaining amount is gonna be your daily living, your entertainment, your miscellaneous and your savings, you should strive to do 10% for savings, no matter how much debt you have, and then trim away at other things you're spending money on, to try to get your percentages in line. So that you know, you're going to be fine. If you are in the process of looking for a new home, that is the time you need to figure out what you really can afford. That's the time to figure out your budget. Even if you just guesstimate what the utilities are gonna be. Even if you just guesstimate all your expenses, you have a general idea of what you'd be able to afford. So if you can buy a home, that's only gonna the the mortgage and you know, the mortgage payment with taxes, and insurance is only going to be around 28% of your income, you're going to be doing a whole lot better. And then if that numbers 38%. Now the closer the 40% you get, the more you're gonna struggle to pay for other things in life. So plan ahead, know what you're getting into, understand what you're getting into. And better you can do it, the better off you can be. Same way for your transportation, if your transportation cost becomes 30% of your income, either you have a car you can afford, or two cars you can't afford, you got maybe too much debt on those automobiles you hadn't. You don't have any equity, well, you never really have equity in an automobile because it depreciates it reduces its value goes down over time as you rack up the miles. So that may be an indication of where you can trim back your budget. Maybe you can sell one of those cars and pay off the loan and use save up some money and use buy a good used car that you can either pay cash for or have a lot smaller loan on that you can pay off quicker. And it would free up more money within your budget and in your life to help you get rid of other credit card debt percentages that were given you or what have found in the past. And what I remember, the power of budgeting is quite possible to save more than $14,000 annually on a $40,000 salary, with the aggressive recommending budgets percentages above. Yet, regardless of whether you prefer an aggressive basic or other type of budget, breaking up your spending categories by percentages is powerful. It shows you exactly where your money is going and how much your income is used for certain expenses. So that's in chime.com. And I happen to agree with all that. They are 100% correct. I'll be back in one moment with my final thoughts. If you listen to this podcast reduce that increase well on an Apple device Scroll through all the episodes towards the bottom. And you can select write a review, and leave your comments. And you can rate this podcast. I appreciate all feedback. And I thank you for your time and doing so. Knowing your budgeted dollar amounts and percentages by category will help you identify your spending problems and help you in the future. So you'd be able to make changes. As you go to the end of this episode, I was talking about guesstimating expenses. And I was referring to you're planning on buying a home, it was guesstimating your future expenses. So a budget not only can help you look in the past to see where your problems are, and keep currently to help prevent you from falling into those problems. But it also can be used to project to future to see what your budget or finances will look like if you buy that new home. That's what I was referring to when I talk about making guesstimate. We're talking about creating a future budget to see what your finances look like if you would purchase a home at that particular price. Knowing and keeping track of your spending is the most important thing you can do. Whether you're trying to pay off credit card debt, or increase your savings for whatever reasons. Knowing your budget numbers and knowing the percentages that relates to your income will help you achieve whatever goals you're trying to reach.