Budgets – Where Do We Start?
Looking to make a family budget but don’t know where to start? I know, it can be daunting. How much should we allocate for housing? autos? eating out? Although each family is unique, based on lifestyle and total family income, the percentages of income allocated for each budget category fall within a fairly tight range. Here is a time-tested starting point for families to build upon based on their goals and lifestyle.
Net Spendable Income
Before we get started, we need to have a common starting point and that is your Net Spendable Income (NSI). What is net spendable income? It is your gross income for the month, minus your taxes, deductions and giving. Your NSI is the amount of money you have each month to allocate towards your life expenses and savings.
Budget Starting Point(s)
First, there are a couple different starting points depending upon the family having a) consumer/school debt and b) children. These allocations will be denoted by having a “d” or “c” respectively.
Second, there is one golden rule: The budget can total no more than 100% of NSI. So if you have debt or children expenses, you have to adjust other categories so that don’t go over your budget.
Third, and we advocate this, if you are striving for financial freedom we would make a few changes: Eliminate debt by allocating a higher portion of the budget toward it until it is gone, and reducing entertainment and other allocations to put the money towards savings. In this case, I would prioritize debt elimination above all else, then boost savings to 20% or more of NSI.
Budget Allocations: Starting Point
Category: % of NSI Includes:
Housing: 35% Mortgage/rent, utilities, HOA, cable, internet, taxes
Savings/Investments: 16% Emergency fund, retirement, investments, savings
Autos: 12% Auto payments, gas, car insurance, repairs
Food: 12% Groceries, snacks, nutritional products, supplements
Debt: 5% d Credit Cards & Student Loans
Entertain/Personal: 15% Eating out, clothing, pets, beauty, vacations, gifts, entertainment
Med/Dental/Insurance: 5% Medical expenses, life insurance, prescriptions
Children: 5% c School lunch, babysitters, activities, supplies, etc
Misc: 5% Cleaning products, home repair, everything else
Remember, the total can not exceed 100% of your NSI, so if you have children or debt service, you must reduce the other categories to ensure the budget is balanced. These allocations listed above are a healthy place to start when you want to develop a balanced budget. Now personalize it to meet your needs. Maybe you have higher housing costs? Maybe you want to drive a little bit more car that costs more money to run? That’s fine but requires you to downsize other budget categories to make the budget balance. Make your plan, discuss it with your spouse and live by a balanced budget that meets your goals and objectives. Live financially free!