Budgeting 101

The Budgeting Series

We begin this particular post with a scary word for some: budgeting. For one reason or another, budgeting seems to be a terrifying subject for many to discuss – and it really shouldn’t be. I believe we should be teaching our kids how to budget and manage their money and the earlier the better. Still, it’s never too late to learn the skill; in fact, I’d argue it’s paramount you learn it as soon as possible. I’ve had the idea for this post for some time now; people have asked me about this topic – from advice to how I do it. I just redid our budget for us because we are buying another house and our financial picture is changing. A new house presents new expenses and I wanted to know exactly what we are looking at. So, with the above in mind, let’s get started with this post and explore some budgeting basics, shall we?

What is Budgeting?

Budget – Telling your money where to go instead of wondering where it went. Image credit here

Long-time readers will know that I prefer to start off with a definition and build from there. I like to have a firm foundation to build on. With that said, I like the simple definition NerdWallet provides: “A budget is a spending plan based on income and expenses.”

Read that again: A budget is a spending plan based on income and expenses.”

Put another way, it’s tracking money coming in and money going out.

THAT’S IT. It’s not something mystical, difficult, or confusing. In fact, it’s really simple to do but you have to want to do it for it to be successful.

Where to start with budgeting

Don’t get overwhelmed and fall prey to paralysis by analysis – START SOMEWHERE. Image credit here

I will be approaching this post from a skilled trades perspective; how I budget is easily replicated. There are some variations out there – and I’ll address them – but for the most part, the way I budget can be copied for many of my brothers and sisters out there. Moreover, this is geared toward a personal budget; individual or family. Company budgets are beyond the intent of this post.

To start, we have to know how much money we have coming in – that’s your income. For simplicity, we are going to use some easy numbers in our budget.

Let’s say you bring in after-taxes $1,000 a week. The typical month has 4 weeks in it, so that is $4,000.

That is your starting point. You have $4,000 to spend in a typical month. Your expenses MUST NOT EXCEED $4,000 or you go into debt. Even better is if you live below your means; spending less than you make to save some.

Does that seem simple? It should – it really is as simple as money in, money out.

**NOTE: Yes, I am aware the above only covers 48 weeks and there are 52 weeks in a year. We are going to look at weekly budgeting and not on a monthly basis, however. The reason why? Because it’s simpler to use. Many in the trades get paid on a weekly basis and that is the easiest way to do this. Moreover, it’s a bit more complicated to divide up expenses that way – here, let me show you using the $1,000 from above.

$1,000 x 52 = $52,000 a year

$52,000/12 = $4333.33 per month

Using the above, in theory, you should have $4333.33 per month – the reality is, however, you don’t. What you are actually doing is taking the 4 extra weeks and dispersing that amount throughout each month. Instead, I think it’s more prudent to budget based on 4 weeks a month like 8 months out of the year – and those other 4 weeks? They can be surpluses!**

Budgeting – Income and Expenses

Now that we have established how much income we bring in, let’s use it as a baseline and go over our expenses.

Income = $4,000 per month

Expenses:

• $1,000 house payment (likely your biggest expense)
• $200 power bill
• $150 water bill
• $750 food budget
• $700 car payment (the average amount in America for a new car according to NerdWallet)
• $500 IRA contribution (125 weekly – the amount you need to contribute to max out at $6,500 a year for 2023)
• $250 gas/fuel
• $150 cell phone plan
• $100 car insurance
• $50 internet
• $50 clothing
• $100 entertainment (varies to your tastes)

Total of all expenses = $4,000

$4,000 – $4,000 = $0 in positive income – or zero-based budgeting)

Now I’m well aware each family has different spending habits and different needs. The above, however, serves as a great starting point. Some of you reading this may not have a car payment (like me). Others may have two car payments. Perhaps you have a greater amount of income coming in because both spouses work. You likely have a larger food budget – ESPECIALLY if you have teenagers in the fold. The point is, while there are differences between each family and their needs, taking the time to actually put to paper your income/expenses is important. And, according to CNBC and a survey they mention, 73% of Americans do not follow a budget. As far as I’m concerned, that’s rather alarming. Moreover, I do not agree with the “expert” in the article who says you don’t need to follow a budget either; that’s just gobbledegook. In retirement, you will HAVE TO FOLLOW A BUDGET as your income is limited and how do you save for retirement when you don’t know how much money you make and spend? What’s more, when you go to retire, how will you know you have enough to do so without a budget? AND, if you haven’t practiced sound financial doctrine, you will become a drain on society rather than an asset – loathing your retirement (if you even can retire) as opposed to actually enjoying it because you were smart to budget and save.

I swear, sometimes we coin people “experts” to our detriment.

Budgeting – some variations

Every budget is different – and the trades are no exception. Weigh your options. Image credit here

The trades can present some unique situations when it comes to budgeting: overtime, layoffs, going from job to job, etc. Feast or famine is the normal mode of operations for the trades – and I know that all too well.

Still, that isn’t an excuse to not budget; rather, it’s all the more reason to do so. Those who have fluctuating schedules should take the time to factor those in and outline how they plan on paying their bills.

Working overtime? SAVE it – don’t spend it carelessly. You intuitively know those times won’t last – and don’t plan (read budget) on it to pay bills either; instead, save it for the times when things happen BECAUSE THEY WILL. Let’s face it: things happen. Appliances need to be replaced, vehicles need to be fixed, repairs to your home will come – and when they do, it’s FAR better to have money saved up for a rainy day than to put it on a credit card.

Begin Budgeting Now

No matter your situation or lot in life, you should be budgeting – and it’s not difficult to get started. In fact, I took the liberty of not just writing this article but also searching the internet for a basic budgeting worksheet. I went to the Federal Trade Commission at consumer.gov and located this simple one here. This one is especially nice since as you input values, they automatically adjust throughout the budget – eliminating the possibility of missing something. For an even more pertinent example, I took the time to fill out the budget form with the numbers above. You can see it below.

In the example above, you can see how basic it is; especially since I didn’t factor in some items you likely have. For example, I have nothing under health insurance or child care – both are something many pay for – and typically at a significant cost, too.

*** I’ll also take this time to highlight how being in a union is much better for a skilled tradesperson. For most, they do not pay out of pocket to have insurance – that is part of their Collective Bargaining Agreement. Retirement is also something that they don’t pay out of pocket for. In fact, most have TWO types of retirement accounts covered under their CBA: a pension and an annuity fund (similar to a 401k). What that means is that when someone gets their check, they don’t deduct health insurance premiums or retirement contributions – those contributions are in addition to what they get paid. If you are not a member, you should be. ***

Reasons some do not budget

A budget bridges the gap between income and expenses so you know what’s what. Image credit here

First off, my suspicion is that many people do not budget because no one taught them how. I really believe that to be the case. It’s telling how some get into financial trouble, seek help, and discover how recklessly they have been spending their money. What’s also telling is how many people pay off substantial amounts of debt in a short amount of time – and the reason they can do it is that they took the time to understand their finances, make a budget, and stuck to it.

Another reason is that people are lazy. I’ll admit it – I know I am with some things – and many are lazy when it comes to money.

Still, another reason is that people enjoy living in ignorance; ignorance is bliss as they say. It’s always interesting to hear people when they actually track their money and find out just how much money they are spending on food and entertainment. Often, it’s enough to make a substantial difference. I cannot tell you how many times I’ve heard people say they didn’t realize they were spending $500 or more on eating out a month. What could that same $500 look like saved up in a retirement account – allowed to build up due to compound interest?

I’m sure there are many other reasons out there – too many to list, in fact. Whatever reason(s) you may have should be weighed in the scales and found wanting. YOU SHOULD BUDGET AND NEED TO FOR PROPER FINANCIAL SUCCESS. If someone were to tally up ALL the money you’ve made since you started working you’d be flabbergasted at how little you have now.

Look, if you want to continue to struggle, wandering blindly around in the realm of finances, feel free to ignore this post. Before you do that, however, check out this nugget I found: “The number one issue couples fight about is also a topic many couples avoid discussing — money. According to a new survey by Ramsey Solutions, money fights are the second leading cause of divorce, behind infidelity. Results show that both high levels of debt and a lack of communication are major causes for the stress and anxiety surrounding household finances.”

You know what’s expensive? Divorce. Along with that comes stress, anxiety, and turmoil. Budgeting isn’t a guaranteed solution – but it definitely helps.

Benefits of Budgeting

Budgeting allows you to be consistent to invest and coupled with time you build net worth – image credit here

I’ll finish this post by highlighting some of the benefits of budgeting. For starters, most of America’s millionaires became so by budgeting. A National Study of Millionaires by Ramsey Solutions asked 10,000 millionaires about their habits, occupations, etc. to get a better picture of how they achieved their status.

You know what’s interesting? The top 5 occupations are:

1. engineer
2. accountant
3. teacher
4. management
5. attorney

What’s more, the report contains this bombshell: “Only 31% averaged $100,000 a year over the course of their career, and one-third never made six figures in any single working year of their career.”

Reread that. Do you know what that means? I know people in the trades that make close to and over 100,000 a year – so there is NO REASON that ironworker, pipefitter, electrician – or any other of the skilled trades can’t be included in the above list. Talk about a benefit to budgeting!

You know you should have a budget, so what are you waiting for?

*NOTE: This is part 1 of a series on budgeting.*

If you have missed the previous articles in this series, I encourage you to read them before moving forward – they are in linear order for the reader’s sake:

1. Budgeting 101
2. Living Below Your Means
3. Avoiding Lifestyle Inflation
4. Reevaluating Your Budget
5. Tightening Your Financial Belt
6. Introducing Finances to Your Children
7. Tips to Help You Budget Better
8. Reverse Budgeting and Building a Case for Opportunity
9. What Do You REALLY Need To Live?