A lot of people I talk to don’t want to budget. They feel it’s restricting. Maybe you feel the same way!
I get it. You want to be able to spend your money on things you want, and maybe even experiences. You work hard day in and day out to make money. Why should you restrict what you use it on?
When your income is on the lower end, a budget is critical for keeping you out of debt. But as you increase your income, it’s even more critical to keep a budget. In our culture, we tend to spend up to our income level. Making $30,000 per year? You’ll live in an apartment, you’ll cut back on eating out, you’ll try not to travel too often, and you’ll drive your car into the ground.
Making $100,000 per year? You’ll buy a house, lease a car, go on some of those trips you’ve always wanted to go on. And you know what? You’ll probably save just as much money as you did when you were making $30,000. You are bringing in $70,000 more a year but still saving the same amount- that’s a problem. According to Fool.com, American’s are only saving about 5.7% of their disposable income.
That is awful. 5.7%. That is atrocious.
It certainly doesn’t leave room for emergency expenses or a sudden job loss. One study shows that nearly 70% of American’s have less than $1,000 in savings. Yikes! $1,000 isn’t enough to pay for an unexpected automobile repair or even a minor doctor bill. If you aren’t saving much of your paycheck, your entire savings account probably gets wiped out every few months due to some type of emergency.
In the 1970s and early 1980s, American’s saved well over 10% and were even over 15% at one point…on average!
So why all this talk about savings rates? Because it directly relates to your budget. Rachael and I are big believers in creating your budget around your desired savings rate. And if you don’t know how much to save, I highly recommend at least 20% of your household income.
Let’s say your household income is $75,000, you’ll have roughly $60,000 after taxes. This means you should aim to save $12,000 each year or $1,000 per month.
$60,000 divided by 12 months is $5,000 per month. If we save the $1,000, now you’re at $4,000 to play with. Create your budget around that number. Start with your fixed expenses like rent, insurance, utilities, etc. Once you’ve dedicated those, see what’s left for variable expenses that are necessities like food. After that, you can look at budget categories like shopping or eating out.
If you need help figuring out your budget categories, check out our post here.
By creating your budget around what you want to save first, it puts you in control. Sure maybe you can only spend $100 per month on shopping instead of $400. And maybe you have to cook at home rather than eating out every day.
But now you’re in control. What are you in control of? Your present circumstances and your future. You will never again be set back or put on edge because of an emergency expense. Instead of random occurrences being in control, you are. Your savings account is stacking up quickly. You can handle car repair emergencies with ease. You can pay down debt. You decide. Life isn’t taking it to you anymore.
I used to create a budget and not keep up with it. That was just as bad as not having a budget. And you know what? I didn’t ever seem to save any money that way. Ever since adopting a budgeting process, I sleep better at night because I know there’s always cash in the bank and Rachael and I are working towards our short and long term goals because those things are in the budget.
Traveling to Spain? It’s in the budget.
Going to concerts? In the budget.
Playing in volleyball tournaments? In the budget.
Donating to church? In the budget.
Budgets aren’t restricting, they just allow you to guide where your money goes and prioritize the things that are most important to you. A budget allows you to be in control.
If you aren’t a shopper, don’t create a large budget for that category. Re-allocate it to something you’d rather spend on like travel. Hate traveling? Don’t budget for it, and put that money to use eating out with friends or whatever it is you prefer.
So, what do you think? Is it worth giving budgeting a shot? With the scary numbers above, I hope you think so and take action.
If you want to learn how to automatically save 7% of your income, read this post here.