“A budget is telling your money where to go instead of wondering where it went.”
Dave Ramsey
Where’s your money coming and going?
A budget is similar to a statement of cash flows that a corporation keeps. The statement of cash flows outlines money coming in – Inflow – and money going out – Outflow. Inflows include cash from operating revenues, investments or financing. Outflows are expenses that may include operational expenses or fixed costs, like rent. These are general line items that you could start by putting into a budget, although your particular circumstance may be different. In the case of personal finance, you can manage your cash flows into three buckets:
- Income
- Expenses
- Savings
Income
You should track all money coming in via various sources of income. While your salary may be your primary source of income, don’t assume tracking that alone will provide the data necessary to fully build out your budget. You presumably have other forms of income, including a tax refund, gifts, and bonuses. The latter is variable or non-fixed, meaning it is not guaranteed and amounts and timing could vary.
Income line items may include:
Your salary:
The gross amount you get paid per paycheck. The typical amount is your annual salary divided by 26 pay periods.
Your partner’s salary:
Same as above, if applicable
Your Bonus:
If you know or are pretty sure you’re getting a bonus
Revenue:
From a company you may own, or own a stake within (like an LLC or LLLP)
Gifts:
Tax-deductible gift from parents or someone else or cash gifts given to you for any reason
Other:
For example, your tax refund
Expenses
Look at your budget (don’t have one? Start here.) and outline where all your money is going. Expenses line items may include:
Withholding:
I put this category directly under my income category.
Federal taxes:
Uncle Sam will take his cut out of every dollar you earn. This line item will provide a good, widespread view of your outflows on a monthly basis. You can easily identify your recurring Federal and Tax tax withholding amounts by looking at your pay stub.
State taxes:
Each state varies widely in how much they charge you to earn money in the state. This gets trickier if you do business in multiple states because you need to pay taxes in every state. Break out each state into their own line item here.
Health insurance:
Add how much you pay for insurance from your company-sponsored, self controlled or Marketplace account.
Home:
Whether you rent or own, you need to track your most important, and often, the bulk of your outflow. It’s commonly said that no more of 30% of your income should go to housing. I call BS. You may live somewhere with high rent rates and you don’t have the want or ability to leave. You may also have a personal financial strategy that includes a mortgage that accounts for more than 30% of your income.
Housing Expenses:
Break out distinct line items for your utilities and house-oriented expenses beyond your monthly home/apartment payments. These include:
Taxes:
These things… add them to housing, since property taxes are a necessary part of ownership. Taxes are typically applied by the city, county and school district. Those individual percentages are added up to get the mill levy, which is then multiplied by the assessed rate of your home to get to your property tax amount. Check out Investopedia for a great breakdown of how property taxes are calculated.
Note: We cover broader Federal and State taxes that come out of your paycheck below.
Insurance:
Whether you own or rent, you will need to track your insurance. You definitely need home insurance as a homeowner, and can get rental insurance if you live in a rental unit. We track home/renters insurance on a unique line item in this Housing Expenses category of your personal finance budget.
Power:
This needs to be broken out on a separate line item and averaged over time if you’re planning ahead. Look for the times it spikes, and when usage is lower.
Heat:
Same as above; Break this out on a separate line item and averaged over time if you’re planning ahead. Look for the times it spikes, and when usage is lower.
Water:
Same as above; Break this out on a separate line item and averaged over time if you’re planning ahead. Look for the times it spikes, and when usage is lower.
Garbage collection:
This is mainly for homeowners and should be one lump sum that you can plug in.
HOA:
This is only for homeowners and should be one lump sum that you can plug in each year. That said, these will change in case your building needs updates or roads need repair. Track these carefully and pay attention to those HOA meetings and representatives.
Maintenance:
From replacing light bulbs to getting a new hot water tank you should track every single penny. You can bundle these together or break out sub items for the biggest maintenance needs, like roofing, floors, air conditioning, lawn care, mold and pests.
Updates:
Eventually, you may decide to tear down that beat up garage and put up a new one with a little in-law suite attached. Good for you! Make sure to track this in your budget.
Transportation:
No matter what you ride, you need to track any expenditure on two, four or more wheels.
- Drive a car? If you own or lease a vehicle, this will include a monthly payment, insurance, registration, gas and upkeep. These will add up to a sizeable proportion of your income considering the average vehicle payment now stands at $554 per month. If you drive for work – not commuting – there are tax implications. Make sure you’re tracking your miles and gas to put on your tax returns at the end of the year. Many employers also provide a gas card for those driving for their job (like a salesperson). If you own an electric vehicle, you can still get tax incentives. Bear in mind that if you lease, the manufacturer keeps the tax credit. Some states offer tax credits in addition to the federal credit, like California. Per Edmunds: “People who buy or lease a new electric car can get a $2,000 cash rebate. That’s in addition to the federal tax credit…”
- Ride a motorcycle? Not for everyone and fun as hell. Track your expenses like you would a car, but consider the unique costs. A motorcycle is usually cheaper to purchase up front and consumes far less gas than a car. Motorcycles require more expensive insurance than a car, license and registration, as well as extra gear that a car does not, like a helmet. Upkeep for motorcycles should also be accounted for like a car, considering tires are recommended to be changed as often as every 4,000 miles, which will run you hundreds, if not thousands of dollars. Track all of these to the penny.
- Take public transportation? Keep a line item for the cards you use to get on the subway, bus or other means. Most municipalities offer monthly cards which will save you a lot. Do your research so you don’t leave money on the table. For the largest cities, the average monthly cost for public transportation is $67.07 (per ValuePenguin). Where it gets dicey is the percentage of your income that goes to commuting by rail or bus in these cities. New York City is averages about 3.67% of your income, which is less than the national average, while Los Angeles is up to 8.69% of your income.
In terms of the bike purchase, you should determine if you consider that as a one time purchase or depreciate it over time or pay for it as you go. If you slapped down your credit card, DO NOT lump that into your credit card line item, but separate it to its own special line item in order to accurately track the expense. You might utilize your city’s bike program which can save even more on public transportation and way more than owning/leasing a car. The average cost of a commuter bike (not MTB or other bike) is now between $500 – $1,500. Upkeep would be swapping tires (you should do so every 2,000 – 3,000 miles) and other costs would be helmet, seat, equipment, storage and clothing for weather conditions, as well as insurance. Make sure you get and account for insurance, because bike theft is on the rise since the pandemic started (per NPR). - Pleasure vehicle? This author has always dreamed of refurbishing a sporty roadster ever since my neighbor’s dad fixed up an old, convertible Fiat when I was 10 years old. For you, it might be a new Rad Power bike to ride on the weekend, an ATV, a Jeep. Make sure this mode of transportation is tracked in your budget in similar fashion to those listed above.
Needs:
Break out distinct line items for your basic living expenses beyond your home/apartment payments. These include:
Clothing:
Know and track what you, your partner and your child/children’s purchases. Some of this might be under wants, but I still track these in my needs section.
Grocery:
Can be broken down weekly or daily, but I avoid rounding up to a monthly cost. It can appear in your budget like it’s monthly, but your equation in a spreadsheet should show weekly or daily charges if you need to drill down.
Child care:
This is typically billed monthly, but make sure to also highlight and account for annual charges. Remember the tax credits of child care come tax time.
Internet:
Considered a necessity by many, this will be a monthly rate, although some rural areas may still bill based on usage. Make sure you’re accounting for all internet expenses here whether it’s at home or mobile. In terms of the latter, you can name this line item “mobile” since it’s all pretty much connected.
Wants:
These are all line items accounting for the entertainment and enjoyments in your life. This is tough to track because of the natural spontaneity of entertainment expenses. Still, try to get ahead of these as much as possible!
TV:
Cable, satellite or Over the Top (OTT)
Dining out:
Monthly tracking of going out to eat with or without the family.
Going out/Fun:
Whether you’re taking the fam to that new movie or taking your partner on a date (you should definitely do this), make sure to track your variable going out expenses.
Trips/Vacations:
Trips are shorter and some are easy to track; you might know exactly how much that annual lake trip costs down to the penny (so, add it here). For longer vacations, these may change by year. Plan ahead and break out a separate vacation budget accounting for everything from travel and food to sunscreen and ski rentals.
Sports:
Add all the organized sports here, as well as your own endeavors. This could be worthy of the Need category above if yoga or 9/18 holes of golf help you manage your and your partner’s mental health and allow you to live your best lives.
Alcohol:
I used to drink a lot. So much so that I started to track my expenses in our budget. This was a good way to be transparent to my partner who didn’t drink as much and was concerned about my level of intoxication at times. For those who collect wine or love drinking expensive liquors, those purchases are applicable to this line item. Additional considerations would be subscriptions or apps, like Drizzy.
And for those who don’t drink, strike this one.
Gifts:
Birthdays, holidays, just for no reason. Gifts can be calculated and managed in advance by adding this line item.
Debts:
- Student: You are likely one of the Americans who owe an average of $37,500 in student debt. Put this in your debts category and good luck continuing to pay that down.
- Credit Cards: You can set a recurring amount on your card(s) which makes this easy to manage each month. However, this amount may tick up based on usage or decrease as you pay down your interest. Again, track every penny.
- Medical: Whether for delivery of a child or covering rehab from surgery, you can put your medical expenses here. This might be from a payment program.
- Other: As Venmo and easy peer-to-peer payments become part of everyday life, make sure to track the expenses you owe to friends or family.
Savings
Income – Expenses = Savings (net income)
At the end of the year, you can add your net change in net income over the year plus what you started with at the beginning of the year to get your cash at the end of the year. These are your end of year savings.
This category cannot or should not be used frequently. This is what you have to save for retirement, education or a rainy day. Some people would recommend that you not save any money until you’re completely out of credit card debt. It’s up to you.
You can break this into multiple savings areas, including those which come out of your paycheck and are realized before you get to the income minus expenses equation.
Savings:
Whatever you sock away in your savings account, which could be held at the same bank where you have your checking account or at another bank that offers a better interest rate and lower fees.
401(k):
You could put this in the Withholding category if you prefer since these are removed from your pre-tax, gross income. This should be the total amount taken from your paycheck, including the matching amount you get from your company.
IRA:
These are typically private accounts, although some companies offer a (SIMPLE) IRA. You can put these savings into your account after taxes are withheld.
Tools you can use to keep a budget:
- This simple budget template (by Smart About Money) is a good start and easy to manipulate.
- Finance For Fathers personal finance budget spreadsheet. You can download and expand or cut out line items as you need for you, your partner and your kids. Also – please let me know what you think!
- Ramsey offers EveryDollar, which is a free web-based budget planner.
- Use these tools in your checking account:
- Bank of America Spending and Budget tool
- Chase Budget Planner
- Wells Fargo My Money Map
- Check out these budgeting apps (as ranked by Business Insider):
