Monday, March 12, 2018

The February Budget

Having a budget is one of the most important aspects of personal finance. Whether a natural born spender, saver, or anywhere in between, knowing where your money is going is of almighty importance.

I took the time to catalog and write down everything I spent money on in the month of February. I would consider myself a natural born saver, so some may find this boring. I bring a lunch to work from home essentially every day. Dinner is home cooked almost every day. I also 23 and don't have to pay for health insurance yet. Shout out ma and pa.

My girlfriend has been reading what are called, "Money Diaries" from Refinery 29 and I am amazed at the lack of saving or general knowledge of basic personal finance. I understand being young and being free and traveling and doing what you want, but at some point ya gotta think about your future. If you are turning 30 and have saved nothing, or put nothing towards retirement, you are far behind.

Math Example!

Person 1 is 23 and has 42 years until they retire - hypothetically. Person 1 puts $100 per month towards retirement and earns an average annual return of 7%.
Person 2 is 30 and has 35 years until they retire - hypothetically. Person 2 puts $100 per month towards retirement and earns an average annual return of 7%.

At the age of 65...
Person 1:  $304,370.73
Person 2:  $180,105.46                                 This is significant

What about $200 per month by the age of 65?
Person 1:  $608,741.45
Person 2:  $360,210.92                                 This is also significant.

Let's pose this one other way. Let's suppose your goal is to have an IRA with the dollar amount of $200,000 by the time you turn 65. You know you can earn 7% annually as a return and want to find out how much per month you need to contribute. Let's also suppose the same ages above. A 23 year old and a 30 year old with no prior savings are wondering.

The 23 year old would need to save $65.70 per month. Seems pretty simple. I'm sure many of us can find an extra $66 per month, or about $33 per paycheck.
The 30 year old will have to save just a bit more. $111.05 per month. For someone not used to saving anything, this may prove difficult at first. But you know what may help?

A budget.

If personal finance is an interest of yours, whether you've perfected it and have it down to a science, or are just trying to figure this 'life' thing out and want to learn more, there is one thing I believe everyone should have. That is an emergency fund. Having a checking or savings account with somewhere between 3-6 months of living expenses in it at all times. Not a discretionary fund, not a vacation fund. Emergency only.

If you or a spouse lose a job. If you're hit with unforeseen medical expenses. If there is a tragedy and your home is no longer standing. Whatever it are you going to continue to survive? The chances of things like this happening are slim, but the emergency fund essentially is providing you with insurance.

Take a look at my expenses from February.

During this month, I took a trip across the midwest to be home for a long weekend and spent more on gas than normal. I also spent less on groceries due to the traveling as well. Besides that, I would consider myself to be very lucky. I don't have to worry about a car payment, I'm still on my parents insurance, and rent is super doable.

That being said, I still don't spend money on stuff I don't need. That is one of my greatest personal finance strengths; having the will power to not spend money on things I do not need.

Here is a look at my February income.

It was a real good month in terms of income. Way more than I normally get. I was given a very wonderful quarterly bonus and was able to get some overtime on the books.

This is all well and good, but writing every single transaction down can be a real burden. Sometimes, and for some people, that may be necessary in starting a budget. And actually, that will seem even more important with what I am about to say next.

Actually CREATE a budget. Sit down and be honest with yourself after a month of expenses. If saving isn't a priority and you want it to become one, first figure out how much per month you want to save. Then, TREAT YOUR SAVINGS AS AN EXPENSE FIRST.

Then go through your own expenses - rent, utilities, nights out, nights in, whatever it may be, but budget for them to match your income. Instead of getting coffee every morning, cut it down to only 3, make coffee at home, and save yourself 5-10 dollars a week straight away. Bring lunch from home 2 days a week and save yourself $20. Don't order takeout and save $15 dollars like that.

I was on Etsy and found these very perfect downloadable pdf's to help create a budget. I got one from CustomerPlannersByEm, only $1.20, and have a screenshot posted below.

Before the month started, or as it started, I sat down and made my budget. I expected to make a total of $1,600 for the month, knew my rent, and went from there. I keep track of utilities anyway and averaged them all out. Gas, I was thinking two fill ups per month, assumed two date nights, and budgeted another $60 for other random things. I like to give myself about a paycheck as expenses, tend to transfer another $600 into savings, and then should wind up increasing my savings account by about $200 each time.

The monthly budget sheet really helped me narrow my spending down and create a plan. Honestly shout out to Em for creating this.

What is most important, and what I really hope at least one person take away from this is the presence of mind to start saving. To keep track of expenses. To take a step in the right direction for your OWN personal finance.

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