Creating A Budget

I've committed to squeezing my flabby money habits into that new skin-tight budget. Oh brother! Wearing this thing is a bit painful. Here's how I did it.
Creating a budget after 36 years of living without one is like finding that perfect pair of jeans. You try them on in the store, and you cannot believe how great those jeans make you look. Then you take 'em home, wash 'em a few times. Suddenly they're a little too snug -- or your butt is a little too ample -- and you're trying to squeeze yourself into a pair of pants (and a budget) that doesn't fit or feel that great.

Luckily, you know that even though your jeans will never again achieve the Britney-like perfection they had in the store, they will loosen up. And the good news I bring to you, my financial pal, is that so does the budget. Or at least you get more comfortable. But there is that period when you're squirming around, feeling like you gotta wriggle into something that's two sizes too small. Here's how I did it.

Just Don't Inhale

The basic concept behind my budget is to establish a few big categories for tracking my spending, rather than fret over every penny. The most important goal is to limit committed spending (e.g. rent or mortgage, insurance, taxes, kids' music lessons, pet food, car payments) to 60% of your gross income. Then you divide the remaining 40% into four chunks: 10% to retirement; 10% to long-term and emergency savings; 10% for irregular expenses; 10% for fun money.

Since I hate counting pennies, I love dividing my money into chunks that are big enough to keep things simple, yet also allow for growth, change and expecting the unexpected. The trouble was learning to live within that svelte 60%.

Although I'm a freelance writer, I do have some regular writing assignments (like this one), so about 70% of my income is fairly steady from month to month. The rest comes in the form of big checks for longer articles that I get five or six times a year. Mind you, I also have to pay a big tax bill once every quarter. So the top priority for me was to translate this vague notion of 60% into real numbers.

Doing the Math

For the sake of argument and to preserve some tiny shred of financial privacy for myself, let's fantasize that I make about $75,000 a year. I don't, but, A) this is roughly the median income range for the readers of most personal finance magazines, and, B) it's close enough so that the exercise actually worked for me. Multiplying $75,000 by 60% and dividing the result by 12 leaves me with $3,750 per month for my committed spending.
Let's say that my regular assignments provide about $4,400 per month that I can count on. That's more than enough for my committed expenses -- including taxes -- but I also need my fun money every month. Please note: fun, or what I call Doing Stuff With Friends, should not be part of the 60%. You take that out of your 10% fun category. Taking 10% of $75,000 and dividing by 12, I get $625 per month for fun -- or roughly $150 per week.
I fund retirement and irregular savings and debt repayment from those big irregular checks. The one thing I have to be careful about is to set aside money each month to pay my taxes when they're due. (If you get a regular paycheck, taxes have already been withheld, of course.)

Learning to Live With the Numbers

This was weird for me. Living on a budget means living within certain limitations. I like to think of myself as a limitless kind of gal.
That's where knowing the numbers comes in handy. You can't argue with them. If I want to spend more than $150 a week socializing (which in New York is painfully easy to do), I lose out in another category, like paying down debt (which is what I'm using the 10% long-term savings category for).
In my last column, I used the Spending Analyzer on my MSN Money account and realized that I was taking out an insane amount of money in ATM withdrawals. That left me wondering where it all went.

I started using my debit card for more purchases and soon figured out that the source of trouble for me is the fun category: hanging out, eating out, meeting for drinks, coffee, lunch. Clearly I'm having WAY more fun than I can technically afford.

But that's the point of a budget, isn't it? It holds up a mirror to all those unsightly blemishes you'd rather not see. And you might be surprised by what you do see when you start looking. I don't need to break myself of an expensive shoe habit, but the Doing Stuff With Friends category is breaking the bank! The other night I met one friend for a drink, and then we joined other friends for dinner. I spent $50, one third of my fun budget, in one night, without batting an eye.

That's gotta stop. And it has. I've started cooking more, eating out less and inviting friends over to hang out at home -- home being noticeably cheaper than most Manhattan restaurants. (And I make a mean shrimp scampi.)

When Temptation Rears its Ugly Head

But your budget is never safe. It's constantly under siege by the temptations of the world.

Mine was an almost-irresistible opportunity to rent a room in a year-round country house. When you don't own a vacation home, renting a room in a shared house with friends is the perfect way to survive New York City life. Plus, this one was cheap (relatively speaking) at about $270 a month.
We've all had these moments. You waltz across something you want badly -- a new coat, a new car, a vacation. You know it's not going to break the bank. It might even be a deal.

So under the benign influence of Spending Delusion #1, "I have to buy it because it's so cheap," you justify spending money you don't have.
Or you find a way to make it work. I realized, facing the painful, gut-wrenching reality of my budget, that I simply don't earn enough to justify spending a measly $270 a month extra on anything. Period. So I could let the getaway house get away -- or I could get creative and make room in the 60% I've set aside for committed expenses.

One way is to finagle a little extra money. As a freelancer I can do that -- you can too, by working overtime, say, or having a massive garage sale. That helps, but it's not going to pay a regular rent bill.

Then my editor had an idea (because really, he does want me to succeed at this, if only because it makes him look good). He pointed out that by depositing the 10% of my income designated for retirement (that's about $7,500) into a SEP-IRA (that's a 401(k) for the self-employed), I'd reduce my taxes by $870 a year, or $70 a month.

The question is, can I cut $200 a month worth of fat from my 60%? That would mean cutting $50 a week from somewhere. That's going to take a little more self-analysis.

But $50 a week is about $10 a day. Surely I can cut $10 a day in order to have a room in a house in the country. But realistically speaking, that's going to take some time, and I'll have to keep you posted.

Th-th-th-that's Not All, Folks

I wish it were. But as I've discovered, these are the skills you need to live sensibly with money. It's slow. It's like trying to tighten up your flabby gut at the gym. I have to break myself of old habits and create new ones -- and be disciplined. Did I want that lovely butcher-block kitchen cart I saw at Crate & Barrel for $249? Yes. Did I instead go to a junk shop and buy a modest $25 steel cabinet on which I can put my plastic cutting board? You betcha.
I'm telling you, if I can figure this out, ANYONE CAN.

My next challenge will be setting up a financial system for making sure my retirement money goes where it's supposed to and that I put the savings for irregular expenses in a place where it won't accidentally get mixed in with the dining-out money. Because, trust me, if you are new to this, you don't want to leave anything up to chance. Because chances are, you'll just spend it. And we're not doing that anymore, are we?

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