Smart Borrower Center
Tools to help you borrow better
For many of us, accepting that we need to put ourselves on a budget is on par with turning down a slice of birthday cake –- the mind is willing, but the willpower just isn’t there. Here are some ideas to motivate you, plus a budget worksheet to help you get started.
Income
The first, and most important, figure that you need to know in order to create a budget is your take-home (after-tax) income. If you have a partner who shares household expenses with you, this is the combined amount of your take-home salaries.
Also, if you have any other forms of regular income, either from investments, freelance work or child support, factor those in to your take-home income as well. This will give you the amount of income upon which to base your budget.
Spend more than your take-home income per month and you will accrue debt, spend less than and you’ll have money to spare. It’s not a complicated equation, just simple subtraction.
Expenses
To avoid overspending, it’s vital to keep track of your expenses. Here are a few guidelines to consider:
• 30 percent for housing
Housing and utility costs are recommended to be no more than 30 percent of your income. When you apply for a mortgage, lenders like the total of your housing expenses to not exceed 28 percent.
• 25 percent for living expenses
Living expenses, such as food, clothing and entertainment, are best kept at no more than 25 percent of your income. It’s important to separate the “needs” from the “wants” in your life. You will need to buy food each week but you may also want to buy new clothes. If your wants don’t fit your budget, try prioritizing and saving for your top desires.
• 15 percent for transportation
You should aim to keep transportation, including car payments, gas, insurance, parking or transit at no more than 15 percent of your income. Whenever possible, use your own steam to get where you need to go. Walking regularly will not only save you some money, it’s also more environmentally friendly and an excellent way to get some exercise.
• 30 percent for debt
Debt payments, including your mortgage and any other loans, should ideally be no more than 30 percent of your income. This may not be possible in the beginning if you are currently carrying a large amount of debt. However, working towards this goal and paying down your debt will save you a considerable amount in long-term interest charges.
Savings
Along with budgeting for expenses, it’s important to budget for savings. Try to put aside at least 10 percent of your take-home pay each month. It’s a smart idea to use a separate account for these funds that isn’t connected to an ATM card. A good option is an online high-yield savings account or money market account that offers the convenience of automatic electronic transfers and pays a higher-than-normal rate of interest. Before you know it, you’ll have the money you need to reach your financial goals.
Investments
Looking ahead to your financial future is an important part of creating a budget. Instead of spending extra money on personal entertainment, consider investing in a 401(k) or an IRA for your retirement. If you are sitting on a chunk of savings, now may be a good time to consider buying a home or to consult a financial advisor for investment advice to ensure you’re earning the best return possible on your money.
Print our Budget Worksheet.
Return to Financial Literacy Guide.
Published on March 21, 2008