Welcome to the first post of Sunburnt Saver’s Budgeting 101 series. During April, we’ll be talking budgets: why we should budget, how to prioritize our budgets, and how to plan for the expected (and unexpected!). If you like this series, please share your thoughts in the comment and let me know what questions you’d like answered (you can even comment if you don’t like this series!)
Today we’ll be discussing why we should budget. Even if you don’t think you make enough to have a budget, I promise a budget will benefit you. If you have money leftover at the end of the month, but don’t have a good system in place to track it, this post will help you get organized too.
Americans’ savings rate is pretty terrible: less than half of us are saving 5% of our income, and 18% of Americans aren’t saving anything. (Canadians, while your personal savings rate is pretty high, you all could save more too!)
There are a lot of reasons for our poor savings habits, including a sluggish economy, rising expenses for housing and transportation, and un- or under-employment. All of that leads to a vast number of people who live paycheck-to-paycheck, crossing their fingers or praying that an emergency won’t wipe out everything they have.
Luckily, all is not entirely lost. According to the Principal Financial Group, two-thirds of Millennials have established a monthly budget they try to follow. Go us! Of course, this study didn’t say how many Millennials stuck to the budget they planned…
If you’re having trouble creating or sticking to a budget, don’t give up and just go back to hoping you’re not affected by an emergency that puts you in debt. If you’re in debt, it’s not hopeless to set a budget. Eventually we’ll get out of debt, and with a budget, you should get out sooner rather than later.
Personally, I’ve lived paycheck-to-paycheck because of under-employment, but, even with all my housing and transportation expenses, I still managed to save up $1,000 of the course of 9 months. Is that a lot? It is when you’re making $14 an hour (or less, for those who make minimum wage in the US). We can set budgets and save a little bit of money – every bit counts, and reaching that first $1,000 of savings is so worth it!
Why Budget?: Think About Your Future Self
If you’re living paycheck to paycheck because you’re spending too much money on “fun”, like going out to eat regularly or indulging in happy hours more often than you should, it’s time to reflect. While living it up in the city (to quote Bruno Mars) is fun (and somewhat expected) when you’re a Millennial, you need to think about your future self.
Thinking about old-you is easier to do with Face Your Retirement, a tool by Merrill Edge. This tool takes a picture of you through your webcam then ages you over time to show what you’ll (maybe) look like when you’re older. The goal of this tool is to get you to empathize with your future self and make better savings choices now so that you won’t be completely screwed when you’re older.
After all, while many of us say we’ll work until age 50, or 60, or beyond, life has a funny way of messing with us. My Dad planned on working at a job he loved until age 65, yet he retired at 55 due to complications with his heart. Yes, while taking care of yourself is really important (which he wasn’t so great at), you can’t plan car accidents, or inexplicable illnesses, or getting some weird disease from Disneyland. The point is: save now to avoid any crazy surprises by looking at your old-self and thinking, “hmm… s/he looks tired. Maybe s/he wants to retire. I should save up some money now so I won’t be forced to work if I’m no longer able or don’t want to.”
Easy to Say, Hard to Do
Let’s say you’re living paycheck to paycheck not because you go out too much, but because of other life circumstances: a low-paying job, a child, medical bills or other debt. The first thing to do is re-evaluate your budget: is your apartment or house taking too much of your paycheck? If you’re spending 30% or more on housing, consider moving to a less expensive area.
Moving is more easily said than done, but in the long run, reducing your home costs may save the most money. Before making the leap, evaluate what average home or rental prices are in your area: if you’re paying less than most people (say, a rent-controlled apartment in LA), you might want to stay. But if you’re able to move a little farther out and save 15% on housing costs, consider the move. Just make sure your drive (wear and tear on your vehicle and gas costs) isn’t absorbing your savings.
Once you figured out the “big items” (housing, transportation, groceries) and determined what you can reduce or do without, start thinking about your budget. The best way to start planning for your budget is to keep track of everything you buy for two months.
It may seem like a long time, but keeping track of what you buy for at least two months will give you a solid overview of your overall spending habits. Once you see where your money is going, you can re-prioritize your spending based on your goals.
In our next post, I’ll cover how budgeting will help you prioritize the important things in your life and allow you to really enjoy your time, without having to worry so much about expenses. Until then, start paying attention to your spending habits.
It may seem tedious, but tracking where your money goes right now will help you prioritize your spending as you set your budget! Stay tuned for our April series, Budgeting 101. Our next post will be about prioritizing your budget.
Homework: If you’re interested in participating in our Budgeting 101 series, your “homework” is to start tracking how much you spend this week. Write down (either in a notebook or in an Excel spreadsheet) how much you spend every day, week, and/or month to track where your money is going. If you took $20 out of the ATM for happy hour, don’t write down “$20 – date – ATM”. Be specific! Write “$20 – date – money for happy hour with Laura, Jill, Gabe”. We’ll be using your tracking sheet in upcoming posts!