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Need to Budget? Here’s How to Divvy Up Your Income

It's all about compromise and keeping track of where your money is going. 

I’ve done the budget thing before. Well, okay, I’ve tried to do the budget thing before. About a year ago, I decided to keep track of everything I spent money on, from packs of gum to rent, in hopes of becoming more financially responsible. That lasted all of two months, before I no longer cared to see how much of my money fell into the “Fun Stuff” column. But the main reason I didn’t continue tracking my purchases was that I didn’t do anything with the information—like figure out what I should be spending on entertainment and necessities.

It’s important to keep track of your finances, if only to make sure that you’re not spending more than you’re earning. But to work toward concrete goals, like saving for a vacation or cutting back on impulse purchases, you have to set spending parameters for yourself. That means knowing how much of your salary should go toward rent or mortgage payments, savings, and so forth.

How We Live vs. What We Can Live Without
As it turns out, that answer varies depending on whom you consult, as well as your individual needs. Some financial planners operate around fixed percentages, such as 10 percent of one’s income going into savings or only 30 percent being used to pay bills. But others, like Brandi Bernazzani, a financial planner based in San Francisco, prefer to come up with budgetary proportions on a case-by-case basis. “I don’t use percentages,” she shares. “I do something very specific per client, so that each client gets a comprehensive financial plan.” Aaron Forth, the director of product design for Intuit’s personal-finance group, also agrees that budgeting is a very individualized process. “It’s really difficult to live by guidelines like that,” he responds, when asked whether he recommends fixed percentages for clients. “It’s a good way to benchmark yourself, but it’s not always applicable.”

Both Bernazzani and Forth recommend the same starting point for new budgeters: tracking expenditures to see where the money’s going. That way, clients get an idea of prioritized expenses versus things they can cut back on, such as forgoing organic foods at the grocery store so that they can afford a bigger apartment. “Truthfully, for budgets to work, the places where changes need to be made have to [come from] the client,” Bernazzani explains. If such changes aren’t based on self-defined values, they’re less likely to stick.

Forth suggests that people first analyze discretionary categories, like entertainment and groceries, because that’s where cutting back is usually the easiest., a budgeting website owned by Intuit, guides users toward categories that yield the most discretionary spending. “Those are the areas where there are opportunities to improve,” he explains. “In terms of absolute dollars spent, they may not be the biggest categories, but it’s often the decisions that people make on a daily basis that can be changed.” Rethinking those small daily purchases, which add up fast, can make a big difference in one’s budget.

Once spending history and priorities are established, Bernazzani believes that a financial cushion—money set aside in case of emergencies—should be everyone’s primary goal. But how much goes into that fund depends on the person’s situation: job stability, debt, number of dependents, and so on. After that’s figured out, Bernazzani and her clients are better able to determine what’s left over for housing costs, food, utilities, transportation, and the like. Forth agrees about the importance of an emergency fund, advising, “Don’t get caught by surprise … You want to make sure that you can cover these big one-time expenses and be prepared for them.”

Numbers to Start with (and Tweak as Needed)
For those who prefer to start with more general numbers, there are basic budgeting plans with suggested proportions to work around. For example, former MSN Money editor-in-chief Richard Jenkins doesn’t think that pinpointing where the majority of your money’s going is the key to financial planning. “Contrary to the way most people budget … it rarely matters what you’re overspending on—dining out, entertainment, clothes. Who cares? It’s still debt, right?” he writes. Instead, he argues that not planning for major expenses, such as home repairs or buying a car, is what messes things up. His 60% Solution allocates 60 percent of people’s gross income for all necessary expenses. The remaining 40 percent is divided equally among short-term savings used for vacations and repairs, long-term savings used to pay down debt or cover costly emergency situations, a retirement fund, and money for entertainment.

Elizabeth Warren and Amelia Warren Tyagi, the authors of All Your Worth: The Ultimate Lifetime Money Plan, advocate for a different breakdown. Their Balanced Money Formula splits up income into three categories: Must-Haves, Wants, and Savings. “By figuring out now what is a Must-Have and what is a Want,” they write, “you make it very easy to follow the golden rule of financial responsibility: Pay your Must-Haves first.” Must-Haves (things like housing and car payments, necessary groceries, etc.) should take up about 50 percent of one’s salary under this plan; Wants come in at 30 percent.

This figure is significantly higher than Jenkins’s 10 percent allowance, but Warren and Tyagi believe that reducing Wants drastically sets up a vicious cycle of what they call “crash-diet budgeting.” Just as people on overly restrictive diets eventually break down and eat everything in sight, extreme budgeters can deprive themselves of fun for only so long before they go spend-crazy. With enough money set aside for entertainment, there’s no need to feel deprived or guilty about having fun. In other words, everything in moderation—including budgeting.

Words of Wisdom to Live By
Whether you hire a financial planner or use one of the aforementioned budgeting plans and tailor it to suit your needs, coming up with a budget that you can work with and that allows you to set and meet financial goals is essential to lasting financial security. Forth believes that this starts with earning more than you spend and making your money work for you. That means opting for checking and savings accounts with the highest interest yields and using credit cards that offer rewards. “If you can do [these things], more often than not, you’re heading into a good place,” he says.

But neither of these financial principles is possible without your having a solid idea of where your money is going each month—in other words, tracking all of your expenses, either on your own or using’s handy budgeting tool, to establish spending limits for housing, savings, entertainment, and every other life category. “This is the most important piece of a successful plan,” Bernazzani advises. “If you get the budget right, everything else will work. If you don’t, you can work day and night … and you’re not going to see results.” For me, that means facing one of my biggest fears: the sum of my “Fun Stuff” purchases. But if seeing that intimidating number scares a few dollars out of that category and into my “Savings” column, it’ll be well worth the initial shock.

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