Our first two topics in the starting over series explored growing trends in changing careers and divorce, especially as they occur later in life. As part of both trends we discussed budgeting as a key component to success. In March, we explored budgeting ideas in Your Family Budget. In this final installment of the starting over series, we will go a little more in depth on the topic of budgeting.
Whenever possible, prepare for big upcoming changes such as career switches or divorce, by saving six months to 1 year of living expenses. Even when you don’t have an impending change on the horizon, it is important to maintain a 6-12 month safety net for the unexpected and unplanned. Prepare for the worst and you will be able to breathe easier throughout the process.
The first step towards saving 6-12 months of expenditures is to know what this dollar amount is. This requires creating an honest budget to determine what 6-12 months of living expenses equal for you. With a budget, not only will you have a guide for savings, you will also have a clear picture of how much you need to earn going forward. This is particularly helpful in the event of a new career or separation with different household income.
When starting a budget, you don’t have to recreate the wheel. There are budget calculators and budget formulas already in place, tried, tested, and proven successful. Several of these budget calculators are shared in “Your Family Budget”.
One of the most popular budgeting formulas was created by Elizabeth Warren and it is known as the “50/30/20 Budgeting Rule”. As with any formula, your first step is to itemize your monthly expenditures, being sure to list and include everything. Next list your monthly income. Using Warren’s formula, you will then want to breakdown your income payments with 50% going towards needs, 30% towards wants, and 20% into savings OR paying off debt.
A need is defined as something you need to live such as housing, groceries, electric, or water. Minimum monthly payments toward debt are also considered needs. While a 30% allocation going towards wants may seem to be a lot, wants include things you might not consider to be in this category. For example, many consider their monthly phone plan to be a need, but it really constitutes an extra – along with going out to eat, and cable or Netflix subscriptions. Before making a purchase, stop and think. Is this something I need or is this something I want? Splurging on wants every now and again is fine, but establish some boundaries. For example, agree that you will take care of a want once a month and determine a dollar amount to spend ahead of time when you’re creating your budget.
It’s also important to sit down with your budget regularly to make sure you are still on track and to verify that the budget created still works as time changes. A good time to review your budget is when you are paying monthly bills or when you receive your paycheck. A budget, once created, is a working plan that can have the flexibility to change as needed and should be an active part of your financial routine. Don’t create it and forget about it!