Money Can’t Buy Happiness: Avoid Buying Misery Part 1: Create a Budget

Congrats, you’re working a real job and making bank! Now you’ve got to get your finances straight to reach your fullest potential. To do so you’re going to need a solid understanding of some financial basics. This series will touch on a few key areas faced by most millennial professionals. I’ll talk about budgeting, debt (with a focus on student loan debt), bare bones investing, and savings. I’ll also address some ways money can keep you from being your best self. You need some basic skills to determine your financial needs. One of the most basic is personal budgeting.

Estimating Income

If you receive a steady paycheck and have been living somewhere for a while you can tally your fixed expenses (rent/mortgage, student loan/car loan payments, insurance, internet/cellphone, memberships, etc.) and estimate variable expenses (groceries, gas, pet care, household expenses, etc.) Next you need to know your rough income and from there it’s simple addition and subtraction.

When estimating your income don’t forget to consider taxes, health insurance benefits, 401K/IRA and any other withdrawals you have. For purposes of personal budgeting gross income is not particularly useful because net income is the amount of money you have available to use. To find your net income look at your most recent pay stub. In general when you’re trying to figure out income it’s best to underestimate. 

Estimating Expenses

Now that you’ve come up with a reasonable estimate of your net income it’s time to work on estimating expenses. I like to think of expenses in four major categories:

1. Fixed expenses: These are expenses that occur on at a regular interval (monthly, bi-annually etc) that don’t change in cost. Examples would be rent, insurance, internet service, cellphone service, memberships, etc.
2. Debt: This is money that you owe someone else with a set minimum monthly payment but a total amount above that set monthly payment. Debts accrue interest with time and the longer it takes to pay back the amount of the original debt the more interest and money you spend. Examples of this would be student loan payments, mortgage, car payments, and credit card debt.
3. Necessity Variable Expenses: These are expenses that are needed to live but vary in cost month to month and have to be estimated for budgeting. Examples include groceries, gas, personal care, utilities, etc.
4. Extra Variable Expenses:  These are expenses that could be eliminated if you absolutely had to pinch pennies and had no expendable income. Having the right amount of money budgeted for this category is crucial to sticking to your budget. Examples of this include, dining out, entertainment (like going to the movies), hobbies, etc.

Just like it’s important to underestimate your income you should overestimate your variable expenses. This gives you a little breathing room and cushion in your budget. 

See the example below of my personal expense estimate.

In the example you can see the fixed expenses in black. These expenses are billed monthly and don’t change in amount month to month. The next items in red are debts. These are also a consistent monthly amount but are debts rather than expenses, another item to add here could be credit card debt or mortgage payments. The green expenses are variable expenses but are required to live. Things like, personal hygiene items, gas to get to and from work, electric/heat, water, groceries, and clothing are all necessary to live but the amount you spend on them can change month to month.

The blue categories are what I call the extra variable expenses. These items aren’t required to live and the amount you spend on them changes month to month. This is where you can make sacrifices on spending to allow for more saving, investing, etc. The examples above highlight this perspective. Though you love your pets you don’t need them (unless it’s a service dog but that should be categorized differently), no one needs to make an extra student loan payment, or dine out, take vacation, or buy others gifts.

You’re going to spend money on your extra variable expenses because they’re fun so be sure to include them in your budget. If you’re having a tough time deciding if an expense is a need vs want imagine you lost your job and had to live off a meager savings, what expenses could you eliminate? Those things are your extra variable expenses.

Creating a Personal Budget

Now that you’ve estimated your income and expenses you can create a budget! There are plenty of templates available. For ease of use I suggest using something similar to an xcel spreadsheet that does the addition and subtraction for you. It’s simple to find several examples of software, apps, and templates that do this.

If you want to automate the process some so you don’t have to manually enter your expenses consider an app like Mint. You can add all your accounts (credit cards, checking, 401K, etc) and the app will pull all the information through.

Make a budget and keep track of it by checking in on expenses at least once a week and you’ve got this personal finance stuff down. You won’t be wondering if you can afford to get the new Dark Souls game or those awesome shoes. You’ve got your personal cash flow down and know it inside and out. Congrats! Check out part 2 of the “Money Can’t Buy Happiness, Tips to Avoid Buying Misery” series for advice about debt.

What’s one thing you hate about budgeting? One thing you find kind of awesome? Let me know in the comments, send me an email (jeni@millennialmaxims.com), or join our Facebook group and share your favorite goal(s)!