So last week I wrote about how grocery shopping was a good exercise in learning how to stick to a budget. This week I want to talk about aggressive budgeting and how to set up a budget that works for you. I had very limited exposure to budgeting, only one teacher took the time to spell it out for me-but even still no one ever attached a dollar amount to how much I should be spending on things. What is normal? What isn’t? What is a healthy amount, or better yet, what amount could I afford and be consistent with? These questions ran through my mind among the others: “Why does Murray like my boyfriend more than me?”, and “Why am I addicted to peanut butter?”.
Learnvest in their “Basics of Budgeting” presentation (which I thoroughly recommend you check out if you need something a little more interactive) suggests you break your monthly income (after-taxes) and divide it up percentage wise: 50% for fixed expenses (rent, utilities, groceries, insurance, cell phone) 20% for debt repayment and savings (student loans, credit cards, and savings) and 30% for discretionary spending. So for example, if someone takes home 3000.00 per month after taxes their budget should break down a little bit like this:
3000 x .50=1500.00 for fixed expenses
3000 x .20=600.00 for debt/savings
3000 x .30= 900.00 for spending or “fun” money
I get why they said 30% for “fun” money–it’s to keep you from feeling deprived and going insane all over the place with your spending. The less you make, the less 30% actually is. It can get tight, especially say… if you take home only 2000.00 per month (roughly 35,000 per year after taxes) you only have 600 dollars to spend in a month. Still, I think 20% is a little low: between student loans, credit card debt from college, and savings into the “big three” accounts (retirement, emergency fund, long-term savings) 600.00 just doesn’t seem enough to cover it. I suggest and aggressive budgeting approach.
This is how I paid down my credit cards while living in a studio in NYC. It doesn’t matter what bucket the extra money comes from but I put 30% of my income towards my credit cards and had them paid down in about seven months time. It was rough, since I paid nearly 1100.00 in rent the extra 10% came out of my spending money. I think it’s easier to pull 5% from fixed expenses and 5% from discretionary spending. If you do this your budget would look something like this:
3000 x .45=1350.00
3000 x .30=900.00
3000 x .25=750.00
That’s nearly 1000.00 per month towards your debt repayment which is a substantial amount of money. The sooner you get it paid off the sooner you can add more spending money to your monthly budget. I still think you should be saving, but can you imagine how far 900 dollars would go if you didn’t have those bills? I read a lot of personal finance bloggers who only live on 40-50% of their income, which is super impressive. I don’t think my budget model is sustainable over the long term, after all you get older and have a family or a house and your expenses exponentially go up. Living off of 40-50% of your income on a small income is hard. So, while you are still young and single and used to living like a college student I recommend this budget as a way to go. Even if you are older and severely struggling with debt I think you should be paying more than 20%, if you can. 10% extra won’t kill you.
How aggressive are you with your budget? Are you a fan of aggressive budgeting?