Fiscal Responsibility
Last year, I wrote a bit about making real resolutions, not temporary New Year’s resolutions. I still stand by this, but the new year is still a natural time to reflect and plan ahead for the future.
This year, I want to share something that I’ve been doing for the past two years — taking fiscal responsibility. And by that, I mean making a budget. It’s easy, and I think it’s something everyone should do.
Why Bother?
In December 2014, after a year and a half of being a working adult, I checked my bank account and wasn’t particularly happy. As a software engineer, I was making a fair amount of money. Despite this, I had managed to spend almost all of it.
I sat myself down and faced the facts that I didn’t want to face: I was spending way too much, and I didn’t know how much I was spending. For me, there was no concept of a financial anything.
Alarmed by how little I knew, I started reading up and learning a little bit about various things — saving, investing, retirement. There’s a bunch of interesting stuff out there, but the main thing I learned was that the easiest and most effective way of becoming wealthier is to (essentially) save your money.
So, I decided to get my finances in order, which sounded pretty daunting to me. But that’s only because I didn’t know what my finances looked like, and because I didn’t know how to think about my finances. There were questions I wanted to be able to answer, but couldn’t, such as:
- How much have I spent this past week/month?
- Have I been spending too much recently?
- How long would it take for me to be able to pay off/afford X?
- Can I splurge on Y?
It turns out, having a budget allows me to answer all of these things. As it also turns out, budgets aren’t complicated and they’re not hard to keep. At least, not my budget.
I’m the kind of person who really hates constraints. I didn’t want to deal with things like you can only spend up to X on food per week. I also wanted flexibility to allocate/spend as needed. On top of this, I was hoping to still actually be able to have fun as I had been.
Essentially, I wanted to be able to enjoy myself without feeling guilty about my budget. Fortunately, this is entirely doable.
How To Plan Your Budget
Get a calculator, pen, and paper (or any equivalent resources). My aim for planning a budget is just to get a rough idea of how all the numbers work out. Feel free to round and make estimates as necessary.
First, write down your salary. I’ll be making up numbers throughout; my salary here will be $70,000/year.
If you’re contributing to anything pre-tax, subtract it out from your salary. If I’m contributing $500/month = $6000/year to a 401k, I’d be left with $64,000.
Next, figure out how much you owe in taxes. Look up your federal, state, and local tax brackets and figure out about how much you’d owe in taxes. Alternatively, you can find an online tax calculator or estimate based on your most recent taxes. Let’s say I owe $12,000 in federal taxes and $5,000 in combined state and local taxes.
I’m now left with $47,000. In a very rudimentary sense, this is my yearly budget. There’s more fine-tuning to do, but be aware as we move on that you might need to adjust your calculations to fit your scenario.
The next thing to figure out is the bills/payments that you are obligated to pay. Things such as rent ($2,000 x 12 = $24,000), utilities ($1,000), insurance, loans, etc. In my example, subtracting out rent and utilities leaves me with $22,000.
We’re almost done — now estimate any other recurring costs you have. The most obvious thing here is food (~$8,400), but you’ll probably have various subscriptions/memberships. For example, a gym membership ($900) or a Spotify/Netflix subscription ($120). I’m now at $12,580.
Finally, if you know of any one-time expenses you’re expecting to come up this year (e.g., vacation or a medical treatment) itemize those as well. I’ll put down $1,580 for a trip to Europe, leaving me at $11,000.
Analysis and Balancing
Depending on your final numbers and goals, this is the easy/hard part. The final number you ended up with is the amount of money you have to spend on things that you didn’t already anticipate in the previous section. From this amount, you get to decide how much goes to savings and how much you actually get to spend.
For example, I think I’ll spend at most $300/month on fun/social activities. This means, of my remaining $11,000, I want to spend $4,000 on myself and I have $7,000 to save.
Whether or not this is easy or hard depends on your numbers and your goals. If you don’t have enough money to meet the spending and savings goals you want, you’ll need to examine your items to figure out which areas you can compromise on.
A note: although my target is $300/month, I prefer to keep track of things in terms of the total I’ll spend that month. That means taking my post-tax income ($47,000), subtracting the amount I’m saving ($47,000 - $7,000 = $40,000), and dividing by 12 (~$3333). So my monthly budget, for everything post-taxes, is about $3300.
Budgeting Doesn’t Seem Easy
To be honest, there is a hard part in all of this — deciding a reasonable amount to spend vs save, and making the appropriate compromises. But the number crunching itself is straightforward: if you want more money for one item, you’ll need to take it from another item.
You might need to look at your lifestyle and figure out where you can make some sacrifices. Generally, you’ll have hidden recurring expenses that you can change. For example, if you get a $2.50 coffee on weekdays, you’re spending about $2.50 x 5 x 50 = $625 on coffee per year.
There are probably a lot of ways you can find to save in order to meet your goals. Some ideas:
- Stop buying coffee — either quit or make your own.
- Taking the subway over a cab.
- Drinking less at bars.
Do note that making changes doesn’t necessarily mean giving up on things you like. I decided to drink less at bars, either by limiting myself or not going at all. But I didn’t give up drinking or socializing — I learned to make my own cocktails and just invite friends over.
Maintaining
The last part to all of this is maintaining your budget. This is the part I was dreading, but it wasn’t as bad as I thought it would be.
Earlier, I itemized my anticipated expenses in order to come up with an estimated budget of $3,300. This gives me a breakdown of how I came up with a $3,300/month budget.
My trick is this: when it comes to staying within budget, I don’t worry about the breakdown of my spending — I just aim to stay within my $3,300 guideline.
Even from month to month, I’m not dead set on staying under $3,300. I don’t mind going over, but if this happens I need to tighten up during later months to make up for it.
In order to answer the questions posed earlier (e.g. Have I been spending too much recently?), I rely on a very simple tool: a spreadsheet. Every once in a while (for me, every 1–2 months) I’ll go through all my bank statements and copy them into my spreadsheet.
I only update my spreadsheet periodically because I know I’m generally within my budget. If I’m feeling concerned, I’ll update it more often. Either way, logging everything in a spreadsheet is my key to meeting my budget — it lets me know exactly how I’m doing and keeps me honest.
Since I started budgeting and logging my finances, I haven’t needed to stress about my fiscal health. This isn’t because I always meet my monthly budgets, but because I can figure out exactly where I’m standing. If you’re not currently keeping a budget, I hope you’ll give it a shot as well.
Here’s a link to my 2017 finances template. Feel free to make a copy and modify it!
https://docs.google.com/spreadsheets/d/1NFHJ8RQcxT09jNrEa-BCs19ryXM2fb4SJ1euhMO_OcM/edit?usp=sharing
