- Budgets are important
If you don’t know where you were, where you are at, and where you are going you’re lost. Don’t be lost financially. Budgets are important because they are a GPS tracking system for our money.
- Budgets tell us how to allocate our stuff
Confused about where your money is going? Want to save? A budget will tell you how much you are spending and what you are spending it on.
- Budgets make sure everyone is on the same page
If you are rooming with friends, married, or in a business you need a budget. If everyone doesn’t know where the group stands then you can easily come up short.
- A budget is a collection of predictions
Just because you think you have money, doesn’t mean that you will. You can use a budget to help predict the times that you’ll need more or to know when you can save or spend more.
- Budgets let you decide what is essential
Everything in your budget can be divided into three parts: essential, desirable, and expendable. If you are an unexpected medical expense, and you know that you set aside $100 a month on entertainment and flag it as expendable, then you can use that cash to help pay down what is essential, like your medical bill.
- Snowcones are better than snowballs
When using your budget, if you are in debt then you need to pay that down as efficiently as possible. We advocate the Debt Snowcone, attacking the largest and most harmful debts first, then working your way down to debts with lower interest rates.
- Use a paper and pen to get start, use an app to stay on track
The biggest hang up to starting to budget for yourself is the hurdle of recording all your expenses and earnings. Start with a paper and pen, write down everything you remember, then review. Once you’ve gotten the hang of it, move on to an app. For most of us, just using an excel spreadsheet may be enough. We recommend you use something like YouNeedABudget or the Mint app to stay ahead of your spending.
- Stop leaking money
One thing that can kill your financial success is unneeded and unaccounted spending. If you use a credit card, you are placing yourself in the hole before you even have money to spend. If you are withdrawing cash from the ATM, remember that it needs to be reflected in your budget as well. Otherwise, you’re leaking money and may eventually go under.
- The Pareto Rule rules
The Pareto Rule states that about 80% of lives is causes by the other 20%. If you have steady income, try to budget only 80% of that money to your expenses. The other 20% you should try to save and/or invest. If you want to get to financial freedom, you’ll need to save, invest, and budget for both. Using an 80/20 rule or even a 90/10 rule will help you do that.
- Know why you budget
Before you start you need to answer one question: “Why?” You may want to pay off debt, invest in education or retirement, or simply get a grip on your spending. Don’t budget just because you were told it’s a good idea. Go in with an intention. “Actions are by intention, and every person will have what they intended…”
Starting an Emergency Fund
An emergency fund is an amount of money that you save for hard times. Out of sight and out of mind, you don’t use it until you absolutely, positively need it. Many advocate for at least $1000 in savings to be held in an easily accessible location (i.e. in cash or a savings account). While $1000 is a frugal choice, I’d say you probably want a little more than that. If you can save around $3000 dollars for your emergency fund, it will go a long way during hard times.
I recommend $3000 because most unexpected expenses will take a large chunk out of your pocket. Think about your last major car repair, it was probably on the low end of $500 dollars and the high end of $2000. Think about medical bills. Sometimes your insurance won’t kick in until you’ve met your deductible, i.e. the minimum you pay out of pocket in order to have a large portion of your bill covered by the insurance company. Depending on your health insurance plan, your deductible can be anywhere from $1000 to $3000 dollars. What if you had to go to an emergency room for treatment? The costs would sky rocket.
After your Emergency Fund
But what about after you’ve saved that initial 1k (or 3k)? In addition to your emergency fund, you’ll want a “Disaster Fund.” Why? Because while unexpected costs can sideline you if you have a job, those same costs can be disastrous if you lose your job or are disabled.
Generally you’ll want to save about 10% of what you make monthly for your Disaster Fund. Take this 10%, add it to your savings, and act like it is not there. Let’s say you take home 5k a month. 10% of that will be $500 dollars. How long do you save 10% for?
Let’s look at two possible scenarios that could play out in your life:
1) You lose your job.
2) You start your own business.
While the second isn’t really a disaster, you’ll probably be bootstrapping it for a while. How do you maintain an adequate lifestyle when you’re paying for everything without positive earnings? This is where the disaster fund comes in. If you’ve lost your job, it will take a minute before you get another. If you start a business, it will take a minute before you have a positive cash flow.
Most money specialists will tell you to have at least 6 months of your expenses in savings for a Disaster Fund. So if your take home pay is 5k a month, but you only need 3k of it a month to pay for all your expenses, then you’ll need to save 3k x 6 = $18,000. If you’re saving 10%, you’ll cap off your disaster fund in about 36 months or 3 years. What if you increase your savings until you get to that point? Instead of saving 10% when starting your fund, you invest 20%? You’d be saving 1k a month, and that would cut your savings time for the disaster fund in half to 18 month or 1 ½ years.
After you’ve met your 6 months of expenses in your Disaster Fund, you can scale down your savings percentage to something lower. If you are comfortable with where it is, start to invest the same amount you were saving. See some of our article on investments to get a better idea of what to do in that situation.
Bottom line: Start today to secure an emergency fund, then a disaster fund.
The Prophet ﷺ said “If I had mount Uhud in gold in my home I’d give it all away in three nights, except for some money that I’d save to pay off debts.”