Budgeting: the basic building block of financial planning. The idea seems easy enough-- just set aside enough money to cover your expenses and don't overspend, right? In reality, it's not that simple. Effective budgeting involves setting realistic goals, splitting your spending into categories & monitoring your overall spending & interest accrued.
Budgeting is really easy to mess up, too; if you don't set aside adequate amounts of cash, you may decide that it's okay to "go over" the designated amount that you were planning on spending. In reality, this causes your entire budgeting system to collapse. In this blog post, we'll first go over the basic steps for budgeting, and then we'll discuss financial issues that pertain to widows and widowers specifically.
Start off by Creating Goals
Why are you budgeting? What percentage of each paycheck do you want to put into savings? Think about the answers to these questions because they can help you set your spending goals. If you want to save $200 from every paycheck, then this tells you that you have (the total amount of 2 paychecks - $400) available for spending per month, or (Half of your total Paycheck - $100) for a one-week period, if you're receiving bi-weekly paychecks. Decide if you want to break down your budgeting per week, per paycheck period or per month, and set your goal based on this.
Break down your spending into different categories
Your basic categories will probably include: Housing, Utilities, Groceries, Shopping, Debt, Entertainment, Emergency & Savings Funds. Make sure to account for the taxes that will be withdrawn from your paycheck, and also consider all fixed and variable costs (i.e. 401k, loan payments, house down-payments, etc.).
Housing will include rent & any additional costs associated with living in your home (HOA fees, home renovations, etc.).
Utilities vary each month, and typically include water, gas, electricity, trash, sewage & internet/cable. Your apartment complex or Homeowners Association may take care of some of these costs, so make sure that you know what you need to pay & when you need to pay the bill.
Groceries will include food, pet supplies, daily cleaning/household supplies & other items that you use each week (i.e. trash bags, paper towels, toilet paper, etc.). Alternatively, you can split this up into two categories, but I find that most people will purchase all of these items at a one-stop-shop (i.e. during a Target/Walmart trip).
Shopping will include things outside of the realm of daily/weekly use including clothes, shoes, makeup, etc.
Debt includes all debt payments (student loans, credit card spending, etc.). Your debt sources will tend to have interest rates & minimum payments associated with them, which can help to prioritize which debt to repay first.
Entertainment include dinners, movie tickets, live performances or similar "fun" and non-essential activities. Most people set aside the least amount of money towards this category since budgeting is meant to restrict spending in non-essential categories, and promote savings.
Emergency fund should be set aside in case something in your home, like a major appliance, breaks or in the case of another kind of emergency (i.e. you total your car and need to spend additional money for repair & transportation, etc). These funds can go unused and can be deposited into your savings account.
Savings funds are set aside for future use. You can have multiple savings funds, including a vacation fund, retirement/security fund (to ensure your comfort after retirement), housing down-payment fund (to prepare for purchasing a house), etc. or you can choose to have one large savings fund, which you can budget separately.
You also need to consider your priorities; obviously you want to focus on basic needs, like rent/utilities or groceries, before you focus on "entertainment" spendings for fun activities like going to the movies, but you also want to focus on prioritizing things that will increase your quality of life. If you're in a financially stable situation, you can probably find some wiggle-room to decide if you want to prioritize savings for future vacations or monthly live performance allowances.
Additionally, you should avoid "borrowing" money from other categories unless absolutely necessary. If you ever underestimated your spending for groceries, you obviously still need to satisfy your basic needs. In this instance you should use funds from your "Entertainment" category rather than your "Emergency" category, to ensure you're still budgeting enough to cover essential costs first.
Set realistic goals for each category
There are plenty of budgeting apps to help you allocate where to spend your money. You should set goals that you can realistically meet-- otherwise, you'll find yourself overspending time and time again. Your goal should be attainable, but you should also have it be somewhat restricting. You don't want to allocate $300 towards "Entertainment" spending per month when you typically spend $100. Instead, you would want to consider budgeting $70 per week to cut-down on unnecessary spending & increase savings. Self control is a large part of budgeting, because although you may want to buy yourself a designer purse or a brand new grill, you need to focus on living within your means.
Find a Way that Works for You
Some people track spending on an app, others do it manually via paper & pen, and some use their own unique methods, like storing cash in envelopes, to allocate cash for spending. Paper cash can be the easiest way to visualize how much you're spending. If you break-down your spending into categories & put physical cash into envelopes, then you are limiting yourself to spending exactly what's inside each envelope (& you have no excuse to accidentally overspend in certain categories).
When you swipe a credit card, you probably aren't looking at your account balance before you confirm your purchase. This is the easiest way to accidentally overspend, because even if you're consciously limiting your spending, you probably don't remember the exact allowance you have left for the next month. If you're not a fan of the cash budgeting, then consider checking your account and figuring out your spending limit before going to the store, and add up the total for your items before getting into the checkout line.
Another alternative for monitoring spending is to use separate accounts. Rather than just "saving" a portion of your spending, actually put the cash into a separate savings account to avoid wrongful usage of the funds. You might also want to put essential spending-allowance into one checking account, and non-essential spending allowance in the other checking account (i.e. one checking
account is for entertainment/shopping, whereas
the other is for housing/utilities/groceries).
Don't Forget about Debt
Debt may include credit card debt, student loans, car loans, medical debt (from surgeries, ER visits, etc.), home equity loans, and even personal loans made to family/friends. You'll want to prioritize paying off your debt before you prioritize categories like vacation savings or entertainment spending. When you've taken care of your primary obligations first, then you can decide where you want to spend your extra cash.
You'll first want to create a game-plan to tackle your debt. Make a list of the debt that you owe (including minimum payments & interest rate for each source) and then prioritize which debt you'd like to repay first. You can prioritize based on the interest level or amount of debt (i.e. deciding to pay off a $1,000 personal loan before a $50,000 student loan, or vice versa). Your interest rate is very important to consider-- when you're only paying the minimum payment on a credit card, for example, you're barely covering the interest amount for that month & you won't see your total decreasing. For this reason, it might be smart to prioritize debts with higher interest rates.
Each month, you should pay the minimum payments for each debt source and budget additional funds towards your prioritized debt, until you're able to fully pay-off the debt (in other words, focus on one debt-source per month). After paying off your first prioritized debt source, you'll want to move on to the next source & begin allocating additional funds to this source. This Debt Repayment Calculator may help to understand how much you should repay each month.
Most importantly, you'll want to understand and acknowledge any of your late-spouse's debt. In some cases, you may be expected to repay their debt (if you were a co-signer, had a joint-account, etc.). You might not immediately know about their recurring payment schedules or sources, so you will want to research & understand their debts & determine which debts you are responsible for. You may want to look at their emails/physical mail contact the companies/banks to understand their debts. Financial planners & lawyers can offer expert advice into the debt repayment process, and can offer guidance about your responsibilities.
Social Security & State Pensions
If you're retired & you're receiving social security in the place of a paycheck, your budgeting may be a bit different. The average social security payout differs between non-widowed and widowed persons.
"The average monthly Social Security benefit in June 2017 was: $1,391 a month for retired workers [...or] $2,664 a month for a widowed mother and two children." --National Academy of Social Insurance
You'll want to see if you qualify to receive your late-spouse's social security payments, VA benefits or other governmental/military benefits. If you qualify, this can increase your available monthly spending. It's also important to understand how payments change over time (i.e. tax deductions chance during your first year, second year & third year as a widow/er). Read our blog post "Social Security, State Pension, Taxes...oh my" to learn more.
Avoid Living Beyond Your Means
You might need to change your lifestyle to avoid overspending. You may be used to traveling every month to exotic locations, which can be very expensive considering the costs of hotels, taxis, airplanes, and food/entertainment. It can be hard to let go of a lavish lifestyle, but the reality is that your limited budget may not allow you to afford travel.
If you've cut costs & restricted spending but you still aren't making enough money to pay for all of your costs, you might consider getting a part-time job or finding a higher paying full-time job. Check out our blog post "The Job Hunt: All of Your Questions Answered" to learn tips about applying for new job positions.
Alternatively, you might need to downsize your home or sell expensive items that require a lot of upkeep. For example, if you have a luxury car that requires expensive maintenance (due to requiring car parts that are no longer produced, or having poor gas mileage which increases weekly gas costs) you may want to consider selling the car and either purchasing a cheaper make/model or using public transit. Also, if your mortgage payments are too high, you might need to move out of your current home. The most important part of budgeting is learning to live within your means, because otherwise, no amount of budgeting can help you.
Don't Use the Funds Just Because you Have Them
If, at the end of the week or month, you have some left-over cash, don't feel pressured or tempted to use it. You can allocate this cash towards your savings funds and use it for future purchases (i.e. retirement, vacations, etc.)! It can be very tempting when you realize you have $30 left in your entertainment budget & you begin to think about the dinners, spa days and other fun activities that you could partake in, but saving the cash is (usually) so much more valuable. Don't get me wrong, treating yourself occasionally can be a nice thing, but don't use the "left-over" cash just to use it.
Change your Budget as Time Goes On
As your income changes, your needs shift & your debt disappears, it's important to sit down and set new goals to budget for each category. If you find that your budget is not attainable or too limiting, then change the amounts accordingly; this is very important for effective budgeting. You may want to find a financial planner to help you determine your budget to ensure that you're spending efficiently and effectively.
Make sure that your budget is attainable, find a technique that works for you, prioritize essential spending over entertainment & ask for help from a professional financial planner or budgeting app if you can't budget alone. Budgeting is such an individualiz