On budgeting your finances

Will you figure out a budget for me? I make 45k a year and live in Chicago. It’s probably not complicated—I’m just young and an idiot.

I started to respond to your question and then realized that over and over again my answer was just pointing you to Chelsea Fagan’s phenomenal new blog called The Financial Diet. (It really is great. You should all follow it.) Anyway, I thought it might be neat to have Chelsea answer your question directly as a guest contributor, and she very graciously agreed. Here’s what she said:

So, the first step to making a budget is asking yourself some basic-but-essential questions about your financial life: What are your goals? How do you spend your money every month? What are your weak spots? The real answers will vary in practice (you’re only human after all), but they’re a solid starting point for establishing your various categories of spending.

If you’re single earning $45,000 and you live in Chicago – where the city tax rates are much less insulting than here in New York — your take home is probably about $2700 a month, give or take. So let’s use that for the budget. Since I know nothing about you other than your salary and city, my answer will have to be somewhat generic, so apologies in advance if this does not accurately portray your real-life spending habits.

The first thing you’ll want to look at is rent. It’s usually the biggest chunk of your salary, and it dictates how much you’ll have leftover to do other things. In Chicago, you can either err to the luxurious side and get your own studio in a cool neighborhood for about $1300, or you can find a roommate in a slightly less-cool area for around $800. Having once been in a situation where I paid a full 50 percent of my take-home pay in rent every month, I can assure you that not only does your quality of life suffer greatly as a result, but no apartment is actually worth that kind of financial sacrifice. So let’s say you pick something in the middle, a nice roommate situation with a big space (maybe your own bathroom) in a fun part of town, and you pay $1,000 a month.

Now you’re down to $1,700.

There are several things you can budget for at this juncture, but the most adult-like and productive is, “How much do I want to be saving every month?” No matter what you choose, the most essential component of saving is that You. Do. Not. See. The. Money. Ever. Whatever money you are budgeting, it needs to go straight into some faraway account that does not have a card attached to it, one that you cannot access on a whim. That money should never hit your checking account, and your brain should never process it as “money I have access to.” Set up an automatic transfer every time you get your paycheck for the amount. For now, let’s say your savings goals are on the conservative side, and you put $200 into an untouched account per month. It’s not a ton, but it’s a good place to start if you’re not used to saving.

Now you’re at $1,500.

This the point at which you usually start asking yourself a lot of serious questions about your spending habits, and bring in the help of programs like Mint, which can analyze your checking account and tell you how you’ve been using your money in detail. You may be shocked at the amount of clothes you buy each month, or how little you spend on groceries. (I can almost guarantee that you will be shocked to the point of disgust at how much you spend on alcohol.) Usually the food/entertainment/shopping, or “living” section of your budget breaks down into something like $300 a month on groceries and household essentials, $300 a month on bars and restaurants, and another $300 a month on retail shopping and transportation.

And if this sounds like a lot, I can assure you that once you count all of your random trips to Sephora or Forever 21 for a throwaway dress, you will understand that “shopping” is much more than just “I am allowing myself the ability to purchase two nice, carefully-chosen wardrobe items each month.” And restaurants add up more quickly than anything else in your budget, without exception. Shopping and going out are huge, sprawling, monstrous chunks of our budgets that tick up in increments of $10 here and $15 there, and can leave us with nothing to our names but credit card balances and the hazy memories of all the martinis we drank while wearing cute but unnecessary new sweaters, so it’s better to err on the generous side with these categories at first to learn how much you’re actually spending and give yourself a chance to curb any recklessness slowly.

Now you’re at $600, but I assume you have insurance taken out of your check each month, and if you are going with the non-cheapie package, let’s put it at about $200 per month for medical, dental, and two pairs of glasses a year.

Now you’re at $400, but let’s say a $150 of that is going to cable and utilities, and another $50 to your phone. This brings you to $200 of mad money, which, if nothing else comes up – and something always comes up – you can do with as you please.

But this is a very generous budget, one that doesn’t take into account any student loans, credit card debt, or whether you live in suburban Chicago and need a car. This is the budget of someone who lives in the city with a $45,000 salary and nothing else to really worry about in life. If you have, say, $700 a month in student loan payments or you need $400 a month to cover all the costs associated with owning a car, the vast majority of this budget is going to take a huge hit. You’re not going to be able to go out much, you’ll have to live in a crappy apartment with a bunch of roommates, and you may only be able to save $100 a month.

The point of having a budget, though, even if you don’t have a ton to work with, is very similar to calorie counting as a means to eat better. It doesn’t mean you’re going to change your entire life on some sort of crash diet, it just means that you are going to be aware of what is going in versus what is coming out, and enable yourself to put something aside in a conscious, deliberate manner. Even if you have nearly no money to work with after all of your bills, it’s still important to set goals and track your spending for the little amount you are able to go out, and try your best to live within the parameters you’ve set. Because there is nothing worse than being blindsided by an unexpected expense you can’t pay, or a suddenly drained checking account. If (or, rather, when) that happens, you will be glad that you planned ahead.


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