Budgeting is undoubtedly helpful in managing your financial life. Yet many people are loath to do it.
Numeracy skills are one issue. People often think budgeting is mathematically difficult. I doubt true arithmophobia is a common obstacle, but the perception of challenging mathematics — or any mathematics — is certainly a common impediment.
If more people used budgets, then fewer people would have financial problems. Budgeting is that integral to financial literacy. Plus, budgets don’t have to involve higher level math, but math isn’t the only fear that holds people back.
A simple budgeting approach — using only three numbers in the entire budget — could be a great starting point to introduce people to managing their money and beginning on the road to a secure financial future. This is the process behind the un-budget.
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The un-budget relies on three categories of expenses. Your savings expenses are those funds you need to earmark toward mid-term or long-term goals.
Your committed expenses are your debts and other recurring expenses such as utilities and insurance plans. Putting money into your emergency fund also falls into the category of committed expenses.
The remainder is simply your living expenses. There are some minor calculations to get to the first two “category” numbers.
Mid-term and long-term goals are basically for anything five years or further out.
Retirement will be a long-term goal even if it’s imminent, as most of your retirement would still be long-term from a financial perspective. Other typical goals for the mid- and long-term savings bucket are college education and major purchases, such as a vacation home.
Your savings should be at least 20 percent of your income.
At least half of that 20 percent should be specifically earmarked for retirement. If you can’t currently afford 20 percent, then you should be working in that direction.
Simply calculate 20 percent of your gross income. Add up all of your systematic savings and compare it with that number. If you’re saving at least 20 percent, great, keep doing it. If not, you’ll need to work on cutting somewhere else.
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Your committed expenses are most of your recurring expenses. They include your rent or mortgage, auto and other loan payments (including student loans), insurance plans (health, auto, life, homeowners or renters, etc.), your utilities, and your monthly phone payment.
Putting savings into your emergency fund should also be included here. Technically, you may reduce your contributions once you have three to six months of expenses saved, but you would still save into the account to replace any funds you might use.
Your emergency fund stays as a committed expense, since you rarely actually stop funding it.
Other subscriptions can be included here just because it’s easier to do it that way. These include things like Netflix. These really belong in the final category, but they’re easier to deal with here.
Add up all of your committed expenses. The money for these expenses should come out of each paycheck and be deposited into a separate account and the bills should all be paid automatically. It should be very close to a set-it-and-forget-it process.
The remaining expenses are your standard of living. This is your food, travel, entertainment, auto fuel and maintenance, even your clothes. Numerically, it’s what’s left over from your take-home pay after you have funded your savings and your committed expenses.
This is where you have some leeway. You get to choose how you eat and how you dress. You get to decide if you’re going to blow any extra money in restaurants or accumulate it for big vacations. But if you’ve earmarked the money into savings for your goals, and have allocated sufficient money to pay all of your committed expenses, this is where you can fine-tune decisions — if you want.
If you want the simplest plan possible — a true un-budget — you can have your savings and committed expenses directly sent where they go and the remainder deposited into an account that you live off of.
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Any new budget plan should be entered into with care. Many people cannot allocate enough for their savings and committed expenses and still have enough to live on. You still gotta eat. So spend what you need to, but work in the direction of properly funding your savings and meeting all of your other obligations.
Taxes bear mention, as well. Many people cruise along in a steady-state tax situation, getting modest refunds year after year.
But if you have any reason to think your taxes may vary significantly, you should make sure you're putting enough away to avoid surprises.
Hire someone if necessary or use an available software package, but don’t take undue chances with taxes.
The idea behind the un-budget is to make managing your money as easy as possible. To this end, you should automate everything possible. It would also be smart to spend a few minutes at least once a year to make sure everything is still on track. And obviously, monitor your account balances so you don’t inadvertently spend more in one area then you’re depositing.
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It’s also a good idea to check progress toward big goals with a calculator or other method to make sure you’re putting enough away and in the right investments.
There will be occasional changes to some committed expense items — such as car replacement. You may want to continue setting aside the amount of your car payment even when it’s paid off. You can use the accumulated funds for your down payment on the next one.
An un-budget isn’t for everyone. But it can be a great starting point for many people. If you have a complex situation, you may need a more sophisticated spending plan. But if you’re just starting out or you’ve never used a budget before, the un-budget can be a great way to begin taking control of your financial life.
The un-budget provides a way for you to manage your expenses using only a couple of numbers. You have an amount for savings and an amount for committed expenses. The remainder is your standard of living. You get to decide how to best use those resources. There’s no scary math or complex calculations in an un-budget. It’s just a nice, simple way to start becoming more financially literate.