Kimberly Hamilton of Beworth Finance on how she tackled debt in D.C.
What exactly is a budget? A budget is simply setting up some rules for yourself to make the most of your money. You want to figure out – “How do I balance my core expenses such as healthcare, food, insurance, housing, etc. while also having some money for fun and savings or investments?”
1) Figure out all of your income (after-tax). For your regular paycheck, make sure you also set aside the amount that is deducted for 401K, savings, or health/life insurance so you can account for that in your budget. If you are making other types of income that hasn’t been taxed yet, make sure you set aside the amount you will need to pay for taxes or other business expenses.
2) Figure out your yearly and monthly expenses (3 months). Take a look at all the expenses you incurred over the past 3 months and also any expenses that are incurred annually. Try to put these of expenses into the appropriate categories (e.g., food, savings, entertainment, etc.). This will be a good basis to try to figure out what you should be budgeting for and around how much.
3) Choose the best budgeting plan for you. There are many types of budgeting plans (e.g., 50/30/20 budget, the envelope plan, pay yourself first, zero-based budget) – just make sure the one you choose takes into account all of your essential expenses and plans for your future.
4) Track your progress and revisit your budget monthly. Make sure you record your spending each month – there are useful online tools that can help you like Mint.com or You Need a Budget, but basic Excel also works. Revisit your budget each month to see whether you have stayed under or over and if your expenses and needs or priorities have changed.
5) Automate as much as possible and find a buddy. As much as possible, you should automate allocating the money towards specific goals (e.g., savings, investments, bills). Also, it’s always helpful to find an accountability buddy so you are on track.
In this budgeting plan, the recommendation is that you spent 50% of after-tax dollars on necessities, no more than 30% on wants, and at least 20% on savings and debt repayments. Over time, the idea is that someone who follows this budgeting plan can tackle their debt, have the room to still have fun, and build up a good savings account. So what counts under each category?
50% Needs: Needs should be the absolute costs for what you need to live month to month. This can include groceries, utilities, transportation, insurance, housing, childcare, and minimum debt payments. If your needs are greater than 50% already, you will need to either dip into the wants category or try to find ways to keep your expenses lower (e.g., lowering utilities, refinancing debt, etc.).
20% Savings and Debt Repayment: This part of the budget should be to plan for your future First off, you need to make sure you are allocating to these areas:
30% Wants: Wants should be things that are not essential for you to live and work such as eating out, travel and entertainment, etc. The difference between needs and wants can sometimes be a gray area, so just make sure that you define what’s important to you. For some people, that might be traveling once a year to a new city, so make sure you make room for that in your budget.
Remember, as Oprah says “The key to realizing a dream is to focus not on success but on significance – and then even the small steps and little victories along your path will take on greater meaning.”