Budgets for People Living in the Real World

by Jason Dean 

calc Budgets are a lot like Big Foot, UFO’s, and honest politicians — crazy people talk about them, but they don’t really exist, do they?

There are literally thousands of articles on the Web about “creating a budget,” but the vast majority of people who try to actively plan their finances give up after a week or two. Why? Well, for the most part, the plans advocated in many “how to budget” articles are unrealistic. Here is some advice that anyone can stick with!

Discretionary vs. Non-Discretionary Expenses

First you must separate your discretionary expenses from your non-discretionary expenses — this is almost like wants vs. needs. Your non-discretionary expenses are things you absolutely have to spend money on: Rent or mortgage, credit card minimums, utilities, enough food to sustain life, etc. Discretionary expenses are things you could live without: Eating out, your Netflix subscription, and general entertainment expenses are some good examples.

Then there are some ‘tweeners, such as your cell phone and cable bills. For the purposes of this article, we will consider the minimum that you can live with to be non-discretionary, whereas anything on top of that is discretionary. For example, you can’t really get by without expanded-basic cable at $50 a month, but you could live without all the premium channels, pay-per-view, etc. Count the $50 basic-expanded costs as discretionary and all the extras as non-discretionary.

Fixed vs. Variable Expenses

Even more important is the distinction between your fixed and variable expenses. Your fixed expenses are those that are recurring at a predictable rate each month. A student loan payment of $94, would be a good example. In contrast, a variable expense can jump from month to month and is based on your usage. Your cell phone bill, for example, may be $60 a month, but if you go over your minutes, it could be $100, $200, or more!

Sometimes you can’t avoid the extra “usage” that generates higher variable expenses — heat in the winter and AC in the summer are two good examples. But for the most part, you can reduce your consumption to reduce your variable expenses, while you cannot do anything to reduce your fixed expenses (except in the case of credit cards and loans which you can pay off).

Making the Budget

So let’s say you live alone and earn $2,500 a month, after taxes. Your non-discretionary fixed expenses may look like this:

  • $850: Rent
  • $305: Car payment
  • $110: Car insurance
  • $94: Student loan repayment
  • $60: Cell phone
  • $50: Basic-expanded cable
  • $25: Credit card minimums

Already you’re up to $1,494, or close to 3/5 of your paycheck.

Next, estimate your average monthly expense for your non-discretionary variable expenses:

  • $120: Groceries
  • $110: Utilities

Another $330, for a sub-total of $1,724.

Now for your discretionary fixed expenses:

  • $60: Digital cable and premium channels
  • $15: Netflix subscription
  • $13: TiVo subscription
  • $12: Sirius satellite radio

Another $135, bringing the sub-total to $1,859. With an after-tax income of $2,500, this leaves only $571 for your discretionary variable expenses: Entertainment, eating out, etc., as well as saving and investing. Your job is to allocate how much you want to allow yourself for each of these discretionary variable expenses, and stick to it. If you need more money, then find something to cut from the three categories above or earn more!

If you want to be really effective, monitor 100% of your spending — every last dime — for one month. Enter each individual item from every receipt into an Excel spreadsheet and see how much you’re really spending. Then see where you can cut back, if necessary. Good luck!

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2 Responses to “Budgets for People Living in the Real World”

  1. plonkee money » 111th carnival of personal finance - glastonbury edition on July 30th, 2007 4:09 am

    [...] budgets for people living in the real world @ smart money daily, some advice that hopefully anyone can stick to [...]

  2. Daisy on April 29th, 2011 5:50 am

    These example budgets are always very frustrating to me because the numbers are often unrealistic…

    Where in the world does this imaginary single guy live that his TOTAL for electricity, gas, water, and trash is only $110 per month?

    And though this guy has a car…it seems not to need gasoline, as that is not even included as a non-discretionary variable expense! (And what about oil changes and other routine maintenence expenses?)

    I would like to see a budget that accounts for some of the “real world” stuff that folks actually pay….instead of these idealized figures that seem to imply that we all have hundreds and hundreds of dollars every month to blow on entertainment and eating out…

    Best wishes!

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