How To: Budget

Here it is – this isn’t based off any real numbers and it’s pretty basic as far as figuring out a families needs go, but hopefully this outlines a budget and how it works well enough.

I’m going off of an income of $40,800 gross yearly for this Budgeting How To.

Jessica putting money into piggy bank
Jessica’s 2nd birthday present, her very own piggy bank. Circa 2007.

If you’re gross income is $40,800 that boils down to $3,400 a month and $2,550 of that gross monthly income would be take home pay (assuming a 25% tax bracket).

Here’s the math:

$40,800 / 12 (months) = $3,400 X .75 (assuming the 25% tax bracket) = $2,550.

Clear as mud?

NOW. Of that $3,400 gross monthly income you can find out how much you should be paying for your rent/mortgage in order to stay above water. This comes from Dave Ramsey, and I love him, so here it is …

He argues that 26% of your gross monthly income can be used for your entire housing obligation (so if you own a home that would include your taxes and insurance, which can add a couple hundred dollars to your monthly housing costs if you don’t pay attention).

Here’s the math:

$3,400 X .26 = $884 total monthly housing obligation. Not to exceed this number.

Most of us are exceeding this number. Banks in the past would qualify you for a loan regardless of your other debt obligations (speaking of the past 5 years and reason for this housing market) and they’ll qualify you for up to 40% of your TAKE HOME pay.

I’m sure rules have changed as programs have closed, stopped or gone bankrupted from this. And I am not an expert on lending or really have any idea what I’m talking about – so if you do, chirp up.

You guys, we have to be the boss of our money or our money IS GOING TO BE THE BOSS OF US.

Ahem. I may or may not have just had a dose of Dave Ramsey.

Moving on.

So your take home pay is $2,550 and your housing obligations are $884 which leaves you with $1,666 to pay bills, pay down debt if you have some and feed your stomach, possibly a family of stomachs.

Around us we have a BPW, Gas company, Cable and phone company that would be pretty standard for bills. Not entirely sure what it would be by you … some times electric is separate – for us it’s not.

Let’s pretend this fictitious family is normal and has some debt. I’ll assume they spend $400 a month on debt payments, while scraping everything extra together aggressively knocking it out.

They’re smart.

And I’m going to round and guess on some of these just for the illustrations sake:

Bills that you might be paying (insert your own numbers/scenario here):

BPW – $120 on budget plan (encompasses trash, electric and water)
Gas – $55 on budget plan
Cable – $100 because they want internet and 149 channels they don’t watch
Phone – $35 for a landline you’re not using
Cell phone – $99 on a family plan with unlimited minutes
Debt – $400

Here’s the math:

$1,666 – ($120+$55+$100+$35+$99+$400) = $857

Now you have to feed and clothe those stomachs we talked about earlier.

For a family you might need anywhere from $300 to $600 to feed them on a monthly basis, depending on size. We’ll go on the lower end of things here because we’re pretending and it’s nice to save money in fantasy land.

Here’s the math:

$857 – $300 (food for month, includes ALL eating out) = $557

Clothing … Pretend budget here sets aside $50 a month for clothes and they save up for shopping trips/needs and new shoes.

$557 – $50 = $507

Now. Here’s where you need to figure out things like insurance (cars, life, health) what are you paying a month or every 6 months. Add it all up so you have a yearly cost … then divide that number by 12. You might see that you need to be setting aside $150 a month JUST for car and life insurance.

Health insurance for a family, unless taken out of the paycheck ahead of time and paid for by a job … can cost a family $350 to $700 a month. Wowza. (and more I’m sure, remember, I’m rounding and using completely hypothetical numbers).

So here’s that math (and we’ll pretend this family has insurance provided by a job – so we’ll subtract an extra $80 from the paycheck … which I’ll do now … to cover those added costs.)

$507 – ($80+$150) = $277

And there you have it. Throw this money at your debt, in a savings account or – like so many of us – don’t do a darn thing about it and watch it leave your wallet without even saying good bye. If you don’t assign it, it’ll assign itself an exit. Most families have a car payment or two as well. Stop it. You are stupid. Buy a car you can pay for in cash and keep saving for the upgrade. You might have to upgrade 7 times before you’re driving a clean looking, yet still used, car that fits all your wants – but until you can afford those wants … cover the basics of Point A to Point B. This is my only rant. Thank you and good night.

In this exercise I’m going to say this family saved $77 – they knew tires were going to be a needed expense in a few months and put the other $200 towards the debt snowball.

***I’m sure I forgot something – but this was just meant to be an exercise in budgeting. I actually love this stuff – numbers and figuring it all out. Although, truth be told, it’s overwhelming to keep track of most of the time. So we, as a family, use a cash system because it works for us. We also tithe as a family – so our budget breakdown looks a little different than this one. Throw me some of your best ideas! How do you do it differently? Got any tips for the novice budgeters? What are you best kept budget-buster secrets? Or how about your VERY BEST money saving tip?

6 thoughts on “How To: Budget

  1. Small side note: if this family needed extra wriggle room in their budget PRONTO they could cut out the cable (but pay for internet if needed) and save $35 right there – they could also cancel the landline, saving another $35 … that’s $70 in their month that they can use to save or eliminate debt … or maybe their needs outweigh their income and this is just a great way to make every penny count.

    Once their debt of $400 month is gone – and if they made the above changes they could have an extra $470 (plus the extra $200 at the end of the budget they decided to throw at debt) to plan for their futures.

    That’s 40% of their take home pay that they could RECLAIM as their own.

    Powerful, I think. I get goose bumps doing this stuff. Go Dave Ramsey!

  2. Interesting budget, but it doesn’t address any of the normal ‘gotchas’ in life. For instance, where are the dental and medical bills? I don’t know of an insurance company that pays 100% with no deductible. Where is the money for gas for the cars? And oil changes, repairs, etc. for those cars? Where is the retirement contribution? The daycare expenses? The problem with Dave Ramsey is that he doesn’t consider anything other than the basics, and a lot of things come down the pike that are necessary, but not basic in his budgets.

    My advice for this hypothetical family is that they raise their income PRONTO. If they don’t, they’ll be living very frugally and WILL incur debt as they can’t pay for things outside what Ramsey discusses, but are necessary. And this family will have a very miserable penniless old age.

  3. Lara! Oh my goodness … gas. haha. Yup forgot that. And I see the wholes in the budget as well … but for someone who is overwhelmed by a budget I really like Dave’s model (and this really isn’t it, I was just going off memory for most of this) so the extra $200 at the end could be budgeted out better for the extra costs of medical and savings. As well as raising the income, for sure.

    Thank you so much for pointing those things out … apparently I didn’t think it was important for folks to actually drive anywhere!

    – Jodi

  4. Also, in full disclosure – I don’t want you all to feel like I’m talking at your from a soap box … we have a car payment and are stupid. After living without one for almost 4 years, we incurred debt to buy the van. But coming from a place of no debt whatsoever (save for the mortgage) to a car payment and some medical debt … it’s not fun here. I’d rather not be here again.

    I’ll do some revisions to this current budget – maybe up the income and include the forgotten items as well as look at it from a 2 income household with kids, so daycare etc.

    Send me your ideas though šŸ™‚

  5. I find planning out food a month in advance to save us a ton! We spend about $600/month on groceries (which includes food, toiletries, diapers, cleaning supplies etc) if I do this – if I don’t, it easily creeps up to $900. Takes some time at the end of each month to prepare everything (I do it all on a spreadsheet) but you have all your meal plans, shopping lists etc taken care of for the month so just print it off and go for the subsequent weeks. Also, there are several “money saving” websites out there with forums with lots of tips. For instance, did you know that you can substitute regular white vinegar for fabric softener? Go figure :).

  6. Awesome! Love that you think about this stuff and that we had our conversation about this stuff this past summer. I have actually figured somethings out that work well for our budget and family šŸ™‚ But it’s so good to read what other people have to say about it and that other people do live crazily by being on a budget. We figured that if we didn’t tithe or give to other (in missions and what not) our house could be paid off in 3 years…but where is the fun (oh, I mean blessing!) in that?!?!?
    Ha…it is funny but we are making it and we are seeing a difference!

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