It distresses me when I hear a friend talk about living pay-check to pay-check. I know that massive joy and stress reduction await them if they could just get to the point where they are one pay-check ahead. It makes getting to two, three or four pay-checks ahead so much easier. Budgeting, or lack of, seems to be the most common culprit. Many of the people I know have the money they need to make ends meet, but because they lack a spending plan, they don't plan where their money goes and it just "goes"! So, today I wanted to look at the question: where does it all go?
Below is our first sample budget. I chose a median income of $24,000 a year. For an individual starting out of college in that first "real" job, this is a pretty average take-home. It also provides a bench mark for you to consider. If your take home is half that or twice that, you can afford half or twice the amounts I list below. Let's call this first budget "Bob". Note that periodic expenses are averaged to the month.
So, Bob has a pretty decent apartment or a moderate mortgage payment there at the $800 level (for most of the US outside of over priced markets.) Bob has a nice broadband package that lets him watch streaming internet video, he's got a new car that he makes payments on, nothing too fancy. He's paying the minimum on his credit card balance, diligently puts $150 away in savings each month and has a tremendous $35 left over to take his girl out to dinner once a month. Three times if they go for the dollar menu. Bob isn't doing too badly. He has some discipline with the monthly savings but that credit card is going to bleed him out over another three years or so. Bob is pretty much living pay-check to pay-check with a minimal buffer behind him - hence he is Bob Barely, as in barely getting ahead.
Let's look at budget "Tom". Tom is like Bob in most respects but he's been willing to do with a bit less today so that he might have a bit more in the future. Let's see what his budget looks like.
Tom opted for a slightly less spacious property to live in and is saving $200 over Bob. He's not going to be having a family Christmas party in his 750 sq. foot apartment, but it's only costing him $600 a month and he's a bit closer to work (we'll assume.) He's opted for the slowest DSL plan available and is saving $22 over Bob. Tom buys pretty much the same groceries as Bob, but he's allowed himself to have a less than perfect set of wheels, opting to buy a used car for which he paid cash and spends an average of $100 a month in maintenance (the car needed a new muffler, brakes and timing belt this year.) Tom pays his credit card off each month and hasn't had much outside his budget so it's at 0 per month -- he is "MR. DISCIPLINE". As a result of these cost cutting measures, he's able to save $400 a month AND have $127 left over to play with. His girl gets to have dinner each week and watch a DVD back at casa de Tom! :-)
Bob will save $1800 this year which he'll be able to use to wipe out his credit card if he's smart, adding $20 to his play budget next year.
Tom Trending will save
$4800 this year. He can keep adding on to that for a few years and have a decent down payment on a house or he can buy a nicer car or move to a nice place or spend it on a nice trip... it's amazing how many neat things you can do when you are disciplined with your cash flow. A waiter once said something to that effect to me, "Life can be a lot of fun if you're careful with your money." He was like Tom and was telling me how he was preparing to take 4 months off to travel Europe using his savings. When he came back, he planned to go back to being a waiter and living his minimalistic life style again.
So, key points: having a budget is useful. Sticking to it is more useful. Using it to tune your cash flow really makes it worthwhile. It all takes discipline, to which end I hope you find the above encouraging.
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