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Budgeting
Budgeting should go hand and hand with the previous step in the Blog which was tracking your net worth. Budgeting starts with detailing out the plan for each and every dollar and where each and every dollar should go. As Kevin from Shark Tank would say, each dollar is soldier your should know where you are sending your soldiers. And the ultimate goal is to make sure that your soldiers go out and bring back more soldiers. Don’t worry about this part for now as it involves investing and we have some house cleaning to do before we get to investing.
Once you have your budget set up, it is ideal to track each and every dollar. When and from where do the dollars come from and when and where do they go to live or die. Note that in this case, we are tracking our spending, saving, and investing. This type of tracking is different than the tracking of the portfolio. But the results of tracking our budget will end up getting reflected in the portfolio over time.
Usually, the simplest place to start is to take a look at how much money you have coming in each month. Simply take your yearly salary and divide by 12. There will be some corner cases for this approach including salaries that are “lumpy” meaning that the incoming salary isn’t consistent. That is slightly more complex and we will come back to it later. Also, some folks get paid every two weeks so not every month as 2 weeks. We will cover that case as well later on. Bonuses and other lumpy income may come in as well.
Let’s start with a salary of $60,000. Dividing $60,000 by 12 results in a monthly budget income of $5,000.
Now lets look at the expenses. Write down each expense. It may also help to categorize them as well. Note that the largest expenses will be your house, travel, food, medical and taxes.
House will break down into rent (or mortgage), utilities, cleaning supplies, insurance …
Food will break down into food at home, food at work and food at restaurants.
Utilities will include electric, water, gas, cable, dish, and internet.
Medical will be your insurance payments made through your routine paycheck. Medical will also include deductibles and possibly your portion of the medical payments depending on the split between the insurance company and you as specified by your medical benefit package. Also include vision and dental.
Travel will include car payments, insurance, gas, DMV fees, and maintenance.
Taxes will include federal, state, local, property, HOA fees, and sales. Sales tax may be estimated based on how much you spend over time. You can guess at this for now. As you track your expenses you will be able to make better estimates in the future. Or you can embed the taxes in with the purchases you make for now.
So, we have covered the major categories. Now add in additional categories as needed. A Debt category could include student loans, credit cards, and retail store credit. You may wish to enter a category for clothing. The gym maybe a category. Then a category for savings which would include money into a bank account, IRAs, SEPs and 401ks. Entertainment and Gifts may be warranted as well.
Now build your budget and take a look at where your money is going.