We are very pleased to present our first guest blog post written by Anastasia Taber, (www.anastasiataber.com) millennial and citizen of the world. Yes, she is a family relative….
To kick off this new blog category “How To Adult,” I will start with budgeting. My expertise in this subject comes mainly from growing up with my dad who has been a financial adviser for many many years, and runs his own investment advisory firm. Also, my mom is an accountant and together they make a ridiculously good budgeting team. And yes, somehow they ended up with me the English major as their fourth child.
But first, why is budgeting important?
Because if you don’t budget then you will have no idea where your money is going, so you are more likely to overspend and go into debt. Second, you will always underestimate how much those unexpected “emergency” expenses eat into your bank account. And most importantly, budgeting helps remove the sense of panic that your lack of money may be giving you.
So without further ado…
FIRST RULE OF BUDGETING
Pay yourself first. What do I mean by this? Do I mean go out to a nice restaurant and get a professional massage before you sit down to budget? No!
Pay yourself first means you set aside a portion of your after-taxes income and put it in a savings account, 401K, Roth-IRA, or other investment account. This is a chunk of money that you will probably not see again for many years, but in today’s capitalist-run economy (we millennials are not going to survive on Social Security alone), it is IMPERATIVE that you do this.
You can choose any percentage – 5% or 50% – go crazy! My dad suggested that my savings rate should be at a minimum 15%, but recommends 20% if I can somehow swing it. This means that if you are taking home $30,000 AFTER taxes, you should be saving $6,000 a year or $500 a month. Or $375 a month if you chose the minimum 15%. I suggest you go no lower than sending 10% of your income to savings, and always strive to save more, not less.
DAT EMERGENCY SAVINGS
An important subcategory of savings concerns your emergency savings. This is the emergency fund that will save your butt if you: 1) Get hospitalized and your health care plan doesn’t cover every penny (highly likely); 2) Your dog has to go to emergency pet care and you don’t have pet insurance that covers every penny (incredibly likely); 3) Get hit by another motorist who leaves you in the dust and your insurance company screws you over (wow, insurance companies are really getting lambasted in this paragraph).
One of the main reasons you want to have an emergency fund is in case you lose employment, which is why we calculate your ideal emergency savings amount by taking your:
Living expenses for 1 month x 8 = How much you can live on during eight months of funemployment
So if you spend $2,000/month on average that will mean you need to have at least $16,000 in your emergency savings.
I asked my dad why 8 months and he said because it’s the magic number but guess what? (Let me hear you say it.) Yes, you can always save more!
So, let’s figure out your living expenses aka the rest of your budget. Write these categories down in the following order and add your number next to them.
RENT/MORTGAGE – This is your biggest fixed expense, which means you have no option but to pay this contracted amount, unless you want to live in your car, which I don’t recommend. If you are paying rent, the portion should be NO MORE than 1/3rd of your income. I would go so far as to say no more than 1/4th. I know that seems impossible in places like New York or Los Angeles or dear God San Francisco, but keep reading and you’ll see why you’ll want extra money around.
LOANS – Student, personal, auto, etc. You have to pay these or they will leave you with nothing to your name but a terrible credit score. **Please let me mention NEVER TAKE OUT A PAYDAY LOAN EVER I MEAN IT. John Oliver had a brilliant segment about this** First, calculate the minimum payments on your loans. That is the base amount of money that goes towards your loans each month. Of course, if you ever want to pay them off, you will need to contribute a lot more than the minimum payment. If you have to prioritize, choose which loans have higher interest rates. Credit card loans typically have much higher interest rates than federal student loans.
And no, I did not say you can just pay the minimum of your credit card payment. REPEAT AFTER ME: I WILL PAY MY CREDIT CARD BALANCE IN FULL EVERY MONTH. Doing this will put you ahead of 50% of the population.
FOOD – Yeah, you can’t survive without this. I figured out my food budget by using Mint (I will talk about that later) and seeing what I spent on food each month on average. You can use Mint to make subcategories like “Restaurants” and “Fast Food” to add some sanctioned spice to an otherwise grocery food bonanza. You can even get really anal and create a budget for “Coffee” (I did that).
UTILITIES – Power, heat, air conditioning, gas, water. I also include Internet in this (not Cable).
HEALTH CARE – No, this does not include your gym membership. This is what you spend on your health after taxes, such as doctor appointments, teeth cleanings, medications, and repairing your permanent retainer ($200 I’ll never get back).
AUTO/TRANSPORTATION – Auto insurance, gas, oil changes, car washes, maintenance…when that lady in the parking lot unknowingly scrapes the metal of her purse along the length of your car. You can include your auto loan here or with your loans budget, or make them all separate. You can also make your auto insurance a separate budget, if that makes you happy. If you don’t have a car and use public transportation, then include that tiny tiny budget here (lucky you!).
PETS: This is almost optional since you aren’t required to have pets, but if you already have them then you might as well feed them. This will include pet food, toys, pet cleaning supplies, litter/doggy bags, vet visits.
KIDS: Refer to pets.
MISCELLANEOUS SUPPLIES: These are recurring items, such as toilet paper/paper towels/cleaning products/tampons/shampoo that you are required to buy to function as a normal human being.
Notice how just now we are getting to the OPTIONAL expenses? Yeah! Adulthood.
ENTERTAINMENT: The fun stuff! Movies! Amusement parks! Museums! Books! Concerts! Your cable bill. You can create subcategories again here. Don’t go too wild though, you probably don’t have much money left.
TRAVEL: If you’re like me and can’t stand to stay in the same city for too long, then this is an important budget. Includes Christmas tickets and road trips.
CLOTHING: I know what you’re thinking – clothing is optional? Woo! No. No, that’s not what I meant. I mean your binges in Forever 21/JCrew/JoS A Bank are ill-advised and frankly, you can’t afford them. I know our consumer culture has brainwashed you otherwise, but only buy what you need!
MAKEUP: Same deal as clothing.
MISCELLANEOUS: This is different from miscellaneous supplies. These are the non-recurring purchases that you somehow deem necessary, like business cards (if you don’t have a budget for work-related expenses).
OTHER: Any other budget, like a gym membership/health, can go here. But let’s be real, you probably don’t have any money left.
Whew, we’re done! Feel depressed as hell? Sorry about that. That’s why we have an Entertainment budget – so we don’t all go insane and create anarchy. But you’ll feel good now that you’ve sat down, crunched the numbers, and have a MUCH better idea of where your finances are heading. Now you understand that creating a budget is more like an art than a science when you tailor it to your needs and circumstance.
A final note: When you realize how little money you have, the temptation to dip into your savings allocation is going to be mighty tempting. DON’T DO IT. That’s why I listed it first. It is literally the most important category on this post. Instead of stealing from savings, you will have to cut somewhere else on your budget. (No TV!) OR you can have your cake and eat it too by, you guessed it, adding to your income stream! Picking up a side job, asking for a raise at work, finding a better paying job…I know it’s easier said than done but nothing motivates like an incentive.
Feel free to comment or ask any questions. I will definitely return to the finances topic in a future post. 401Ks anyone?
Bonus! Yes, earlier I briefly mentioned Mint. This is an amazing free service/app that you can use on your computer, tablet, phone, or carrier pigeon. Sync up your financial accounts and Mint will help you track expenses as you create budgets. What is most helpful about Mint is it automatically tracks and categorizes your expenses (with room for you to tweak). What I love most about the service is that it helps me visualize where my money is going with nifty bar graphs and pie charts. I highly recommend Mint and I swear on my life that they are not paying me to say that (but Mint if you’re reading this, let’s talk).
Don’t worry everyone! We’ll get through this thing called adulthood, one How To Adult post at a time. Now follow me on Twitter for more updates.