Incomes vary—but so do spending habits. Even if you earn a huge salary now or in the future, if you don’t learn how to budget your paycheck responsibly, you may never achieve financial freedom.
But let’s face it: Budgeting isn’t easy. Juggling your needs (home costs, transportation, groceries) with your wants (entertainment, vacations, eating out) is a constant challenge. Plus, racking up charges on a credit card for things that you want right now is often a lot more tempting than saving for the future.
But it’s important to take a monthly snapshot of your budget to make sure that you’re on the right track. As you'll see, that’s exactly what we asked a family of five, a single woman—and even me and my husband—to do.
To determine if we're all on the best financial course, we also asked Stephany Kirkpatrick, a CFP® with LearnVest Planning Services, to weigh in on what we’re doing well—and how we can boost our budgeting even more.
Jane Bianchi, 30, and Bill McGibony, 29
Occupation: I’m a journalist; Bill is a software consultant.
When we take the time to actually sit down and do the math, I’m delighted to see how much we are saving—buying a house and a car within the next few years are top priorities for us, so we’ve been socking away as much as we can. I’m also glad that we stopped paying for cable TV, and bought a $20 antenna for network shows—since we mainly watch Netflix, it was a waste of money. We also cut corners by avoiding gym memberships, and instead running in the park and doing exercise DVDs indoors. And we’re also very lucky that we have no student loans.
It does pain me, however, to see how much we pay in rent. Living in New York City certainly isn’t cheap, but it would be possible to find a more affordable place. If the money were going toward a mortgage, which is an investment, I wouldn’t worry about it. But when we rent, we feel like we’re just throwing our money down the toilet. That’s a big reason why we’re trying to buy real estate as soon as possible—we just can’t afford the down payment yet.
Looking at our budget, I also notice how we could spend less eating out for lunch and dinner. We’re on-the-go so much that’s it’s all too easy to grab a slice of pizza on the way home from work or order an appetizer when we’re at happy hour with friends. If we cooked more, and brought leftovers to work, we could save a lot more.
What Stephany Says: Holy savings, Batman! This is fantastic. Many New Yorkers find it hard to save money, so I’m thrilled to see that Jane and Bill are setting aside funds for future priorities—they should just make sure that part of this money goes toward an emergency fund and that it’s not all allocated for a house and a car. Trust me, the minute you drain your savings to buy a home, an emergency will come along—it’s Murphy’s law!
RELATED: 7 Reasons You Need an Emergency Fund
Although it's an area that concerns Jane, paying 28% of your income for rent in the city actually isn’t too bad. Their overall essential expenses (housing, utilities, transportation and groceries) are under 40%, which is less than the 50% we recommend. Keeping these costs low means that they have extra room for savings. So even though she feels like they're “throwing money away” on rent, they likely wouldn’t be able to buy a similar place for the same monthly payment, especially when you figure in property taxes, insurance and maintenance costs.
Setting aside a portion of your income for non-monthly expenses, like gifts and travel, is a good idea for anyone. You can do this by setting up a “personal escrow” savings account for such things. Jane and Bill should take a look at a calendar and map out planned expenses for the next year. Once they have this ballpark amount, they can divide it by 12 to figure out how much they need to set aside in a separate account each month to pay for these anticipated expenses.