Creating a Common $ense Budget
Let’s review the reasons for setting up a budget based from Budgeting 101 (Toni McCarty’s previous article):
1. You will know where your money went
2. Helps to get out of debt and stay out of debt
3. Confirms good stewardship over what God has given you
4. You will control your money instead of your money controlling you
5. You can actually see a picture of your financial life
Living Within Your Means
I recently sat down to help a young couple establish a budget as they were feeling a crunch within their finances. After writing down all their expenses, I saw how out of balance their finances were. They never established a budget. Many people will have a list of how much they are sending to their debtors but don’t know they should be working within a percentage system to determine if they are living within their means. A percentage system will also help in identifying the areas where spending may be out of proportion. Another indicator to determine if you are living beyond your means is the “debt-to-income” ratio gauge.
Although the pendulum is beginning to swing in a different direction, some lending institutions have led consumers to believe they can afford items (housing, cars, personal loans) that are far out of their incomes. One family told me they were approved for a mortgage that was 5 times their annual income. They were so excited as they thought they would be getting their “dream” home. Actually, that dream would have become a nightmare had they purchased this home. It was far beyond what they could afford. In this case, becoming a slave to the lender would have become a reality (Proverbs 22:7).
Establishing a Budget
When establishing a budget, not only do you want to honestly write down all the monies that you are spending, you want to establish a percentage of income to be allocated in various categories. This amount may vary depending on your geographic and family structure. Calculating on the conservative side will usually be in your best interest. I would rather error and have extra funds than to error and be in the red.
Start with your monthly net income.
Your net income is the amount of money you take home after taxes, social security, etc. are withheld from your check.
Next, list your monthly fixed expenses and flexible expenses.
Fixed expenses are the payments you must make every month such as rent or mortgage, utilities, car payments. Flexible expenses are costs that change and you can control such as clothing, food, personal spending, recreation, and eating out.
Listed beside the expenditure is a percentage and a range. Because every household is different, the percentage will be different. Your budget should be specific for your family structure, needs, and goals. There is not a “set” budget that will work for everyone.
1. Tithing and Giving – 10% tithe plus giving
This should always be established as the number one priority in your budgeting. Malachi 3:10 (Amplified Version) tells us to, “Bring all the tithes (the whole tenth of your income) into the storehouse, that there may be food in My house, and prove Me now by it, says the Lord of hosts, if I will not open the windows of heaven for you and pour you out a blessing, that there shall not be room enough to receive it.” Remember, the “whole tenth” is based on your gross (before any taxes or deductions) income.
2. Housing – 25% (range of 20 – 30 percent)
Whether mortgage or renting this will be your next priority. This amount will include your mortgage payment, taxes, and insurance. The “old rule” was that you shouldn’t spend more than two and a half times your income on a house. Over time this standard has changed and caused many people to spend beyond what was affordable. Always live below your means.
3. Utilities – 6% (range of 5 – 10 percent)
This would include electricity, gas, telephone, water & sewer, trash removal, cable, and internet service.
4. Food – 15% (range of 15 – 25 percent)
Food is an area that is very flexible. Without wise planning and shopping, the consumer will surely exceed any budgeted amount. Special dietary restrictions and needs will usually increase the percentages spent in this area. Always purchase higher priced items such as meats when on sale. Plan your weekly menus around the sales and use coupons for added savings.
5. Transportation – 12% (range of 8 – 17 percent)
Your transportation category will include your car payment, insurance, parking, gasoline, and maintenance. If you take public transportation, you would allot those expenditures in this category.
6. Savings – 5% (range of 5 – 13 percent)
Saving and investing money has become more difficult. Because we have transcended into a nation of credit card consumers, what we would have saved, we are now using to pay down debt. Even if you are unable to save a percentage of your income now, start a habit of saving even the smallest amount. Having an emergency fund for unanticipated expenses is wisdom. Many financial advisors suggest having anywhere from three months to six months of living expenses in savings in case of an unexpected occurrence.
7. Medical and Insurance – 7% (range of 5 – 19 percent)
These are expenses that are not paid by your employer but are out-of-pocket expenses. This would also include co-pays, dental care, vision care, over-the-counter medications, and expenses for pets. Life insurance would also be included in this category.
8. Debt Payments – 6% (range 4 – 10 percent)
This area includes debt such as personal loans and particularly…credit cards. The pendulum range definitely swings in this area. I have seen this range from 5 to over 28 percent depending on the financial publication. The best percentage in this category is zero percent! Most every financial planner that cares about what is best for you will tell you to, “Pay off your unsecured debt and stay out of debt!” Spending mistakes are not impossible to change. But, you must know the difference between “wants” and “needs.”
9. Clothing – 5% (range 2 – 7 percent)
10. Family Expenditures – 9% (range 5 – 10%)
Entertainment, recreation, personal care such as haircuts, educational obligations, child or day care, etc.
Now, keep track of your expenditures. It may take a few months to adjust but you can do it. There are many forms you can print from the Internet for your tracking or use can use a budgeting program. I update my budget every January and July as finances can change within that time.
Debt-to-Income Ratio
Once you’ve accounted for your finances, you will be able to figure out your debt-to-income ratio and determine part of your financial health.
The debt-to-income ratio will reveal what portion of your income goes to paying off debt. The lower the percentage, the healthier your financial fitness. Financial experts will say that your monthly debt should not exceed 36 percent of your income (this is becoming more difficult – but not impossible as we serve a God of possibilities – since economic growth has slowed and wage increases are almost non-existent).
Calculate your debt-to-income ratio:
1. Add every monthly debt payment
Rent or mortgage (include the taxes and insurance)
Home equity lines
Auto loan
Personal loan
Credit card(s)
Student loan(s)
2. Total your monthly income
Net monthly pay
Any overtime
Bonus (if yearly, divide by 12)
3. Divide the monthly debt by the total monthly income to get the debt-to-income ratio
Examples:
$2,300 in monthly debt divided by $7,000 in monthly income results in a ratio of 32%.
$1,750 in monthly debt divided by $4,000 in monthly income results in a ratio of 43%.
Many people don’t realize the state of their financial affairs until they are already on the road to trouble. The lack of budgeting skills is the primary reason for experiencing financial hardships within the home. By putting the figures on paper (Habakkuk 2:2 – write it down and make it plain), you will create a clear picture of where you stand financially within your home budgeting.
Educating yourself in the arena of personal finances and maintaining good household budgeting is the foundation for successful money management. We are called to be good stewards over what God has given us and He delights in the prosperity of His servant (Psalm 35:27).
Change is good…change can happen…change will happen when you determine that you will live in a manner that glorifies God.
Contributed by Holly Stasiak.
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