Budget – How to Create One and Why it’s Useful
My First Mistake
In high school, I was doing a lot of extra curricular sports, music, and other activities. As a result, I didn’t get my first summer job until I was a freshman in college and a budget was the last thing I had in mind. At the time, I was making $7.00 an hour calling people for a polling institute. Over the course of the summer, I made about $2,000, the largest sum of money I had seen on my own from that point. By Christmas of my sophomore year, that money was gone. The cycle repeated as I took other jobs in college, from my $1,000 per semester research position to my $10 per hour student union manager role, my money always magically vanished by the next pay period.
I had a problem that many my age had. Lack of financial discipline. To me, money was something I used to fuel my lifestyle. For a long time, I wished I had done something different, and writing this article shows that I probably would have if I was 20 with the same information I have now. Without those bad experiences though, I may not be the lucky man I am today, so I try not to regret those bad decisions, but learn from them.
Two Types of People
At the time, I didn’t realize the gravity of my student loans. I knew nothing about organizing my finances and really just thought about the next day.
There are two types of people when it comes to making a budget. Those that don’t, and those that do. Generally the ones who don’t aren’t forward thinking, and suffer in the long term. Granted, they also have a lot of fun, but pay for it later. The other is the type of person that budgets. When you budget money, you sometimes also find that you’re budgeting other things as well such as time, and overall, you may not have those fast and loose times immediately, but you can plan for them. You may miss out on a couple of potentially exciting experiences by budgeting and managing your money, but you will be able to enjoy more down the road and with less stress than someone who doesn’t budget.
Risk
Those that don’t budget also generally are more risky with their money. Not enough goes towards retirement or savings, but instead goes into material goods or experiences. Again, this is a lifestyle choice and there is no judgement if this is something that you find works for you. But after living that life, I strongly believe that budgeting is a significantly superior way of living. It reduces risk, and you may miss out on some reward, but the ultimate reward down the road is much more valuable.
The Transition
The switch for me, was my experience living abroad. I was given $15,000 to live off in a small country in Europe. I needed to plan exactly where each penny was going, or I would run out of money. Being ruthless was necessary since I wasn’t allowed to accept money outside the program. It was also around the same time that I began paying back my student loans.
Right out of the gate, I was spending around $3,000 of that $15,000 in loans or 20%. I now had $12,000 to live off. Then I had to pay for housing and utilities, another $5,000 or 33%. This brought my number down to $7,000. I had to pay for groceries and food, $2,000. Now I was down to $5,000. Finally, before I could even dip into my fun money, I had to pay for my plane tickets there and back, a cost of $2,000 which meant I really only had about $3,000 for emergencies, trips, and socializing for 10 months, or $300 per month.
This was doable for me for the country in which I was located, but I also traveled a few times to more expensive countries. Some months I’d travel a bit, and other months, I’d stay in and work. At first, I was bummed out. I thought that I wouldn’t be able to fully enjoy the experience. My hubris got the better of me, and I started thinking that I deserved to have those good times. I fought with myself until the day I left, but in the end decided that I would try a more economical and humble approach to my finances.
The Results – The More You Give
That one decision changed my life. By budgeting, one is able to best allocate their funds to help others. It forced me to learn that the most valuable lesson is that the more you give, the more you get. Most of the time, what you “get” is not in the form of money, but money is best used helping and lifting up other people outside of yourself. In the meantime, I was still able to have the incredible experiences I wanted to have. Some experiences cost a lot of money, but if you instead focus your energy on the right things, and know exactly how much you have to spend, you get to have even greater experiences than if you had a ton of money.
I was able to travel to nearly 10 different countries during my time in Europe, and stay at some of the nicest hotels and AirBnBs. But I also stayed in a friend’s dorm room, and my tour guide in Egypt was one of the cheaper options. I even stayed for free in Cannes, France and had free admission to the festival. Looking back, the experiences in which I spent the least amount of money were always the most rewarding. And I didn’t get there from spending cash, I got there by building relationships.
The Opposite Happened
I was never stressed about money during my time in Europe, and was able to fully enjoy every moment without worry about going into debt. I used cash to pay for everything, and had money left over when I got back which I promptly put towards my student loans. After that experience, I would be lying if I said I had a few hiccups. When I worked in television for example, I was still a dumb kid and spent way too much money on a camera and film gear that I didn’t need. I greedily thought that it was an investment in myself and my future, when in reality, I was doing it to look cool and potentially score social points. It didn’t work and I ended up selling everything for a lot cheaper than I got it for.
Big League Budgets
When I started at my last role, things changed even more. I made it a mission to leave my parents’ house. (Again, I probably wouldn’t have done that with the knowledge I have now, but I have no regrets since it brought me back to my incredible wife). I saved as much money as possible, and within two months was out on my own again for the first time since Europe. A lot of mistakes were made in my first budget in the “real world.” I spent way too much money each month on housing and food, and not enough on savings and retirement. My first apartment was over 40% of my monthly take home pay which is absurd, and I was spending $100 per week on groceries. Over time, these numbers decreased.
When I moved out to the suburbs from the city, it brought my housing to around 27% of my take home pay. I also shaved spending from food and utilities, dropping food to $60 per week and knocking $30 per month off of my internet. I took an extremely aggressive stab at my loans with that extra income, but what was the best part of it all was that I still wasn’t missing all of the things I thought I would have in the past. Parties and friends were still the norm, but I now had nearly $30k saved in my 401k after two years.
The Future
My wife and I have a beautiful baby girl. With a baby comes more expenses, and in some cases less income than you were used to before. But that doesn’t mean you can’t still give, have fun, or have exciting experiences. In fact, I’m looking forward to doing those new things with my children, more than anything else. Money doesn’t buy joy.
The people in our lives, the relationships we have are all true and real. I’m looking more forward to the time spent with the baby and with our friends and family than any vacation or experience I’ve had before. With a baby comes just rearranging the budget. The time frame is the only thing that really shifts, as well as an examination of what is really important. Giving even more, proper nutrition, good experiences for the children, and a safe habitat are more important than anything else, and I fully intend to provide my family those key elements.
How to Start a Budget
So now that we’ve gotten this far, and I’ve (hopefully) enticed you to start a budget, I need to show you how. There are a million different ways of doing it, but I like to keep things as simple as possible. I have a budget template that I built out a few years ago that works incredibly well.
It breaks out each month based on a bi-weekly payment schedule as this is the most common with sample numbers. It allows you to budget based on the money you actually have coming in, and the two extra payments that happen per year are like little bonuses. This budget also purposely leaves bonuses out (if your job offers them) since those will either go straight to savings, investments, or emergencies. One thing you’ll also notice that is missing is investments. I understand that investing is a moral issue to many, and chose not to include it. This budget therefore assumes that you have a 401k or separate investments, but it isn’t difficult to reallocate one of those budget items as additional investments such as a Roth IRA or a brokerage account. For example, I have my investments listed as an extra budget item.
The Allowance
The allowance is one of the best parts of this budget. It allows me to spend that money on anything I want from going out with friends to a round of golf. As long as it’s under the $100 I get every two weeks, I’m fine. Sometimes if I have something I really want, I’ll even save that allowance for it. This is especially true during the winter for Christmas presents if I want to spoil certain people in my life.
The key is that you can still have fun and enjoy yourself, even with budgeting and planning for the future. I currently put about 15% towards ethical investments, I save about 10% and then rest is housing, fun, and necessities. Extremely simple and effective. Does that mean sometimes I won’t be able to do something I want to do? Yeah, but I’ll do something I wouldn’t have done instead and go out with my friends next week.
Sacrifices will always be a necessity, but they will always be worth it in the long run. You’ll have richer experiences, and feel more at ease each day you know that there is money in the bank. That money translates into piece-of-mind and understanding that you can’t get from a textbook or even a blog post. It comes from experience, and you won’t have that experience until you try budgeting. So give it a shot, you have nothing to lose.