Sara Colley / October 7, 2016

Non-Negotiable Budget Categories

Some expenses you will not be able to easily change. It is important, therefore, to get your initial budget numbers right in these categories, or else you are not likely to be able to successfully follow your budget.

In each of these categories you probably can make changes, but only slowly, over time. Your initial budget projection, therefore, has to start with what you’re really spending, not what you’d like your budget to be. Being unrealistic is unhelpful in all of the budget categories, but particularly so in these four.
Income
Of course you have to start with something on the positive side of the budget equation. If you have no income, then setting spending limits for other categories doesn’t matter much. Your budget is zero.

But is income that straightforward? You would think so, but it isn’t always cut-and-dried. If you are a salaried employee receiving W2 income you pretty much know how much you are receiving every pay check. If you get bonuses or commission income on top of that, though, it gets a little more complicated.

If you are self-employed or earn all your money by commission it’s much more complicated, and you have to build in some reserves to account for the fact that you will have months where your income is much lower than you expected.

In the next section we’ll discuss how to estimate your budget amount in each case.

Suggested sub-categories
· Salary
· Bonuses
· Commission Income
· Other Income

Housing

You would think housing would be pretty straightforward, and it should be. You pay a certain amount for rent, or your mortgage payment is probably fixed. However, don’t forget that rents go up, and even if your mortgage payment is fixed your property taxes and insurance probably are not.

When you estimate your budget for housing expense, be sure to look forward and estimate any anticipated increases. If you budgeting program includes projected increases on specific dates – which is uncommon – then by all means enter that information into the budget. If not, we recommend that you build your increase in now, because you are unlikely to remember when the time comes. It’s better to spend a little less in this category now than to overspend in just a few months.

Suggested sub-categories
· Rent
· Mortgage Payment (Principal and Interest Only)
· Property Taxes
· Insurance (Renter’s or Owner’s)
· HOA Dues
· Mortgage Insurance

Food

You can’t do without food. Well, we can’t, and we assume you can’t either. If you look online for guidance about how much this should be you’ll find huge variations in recommendations. The best way to estimate it in your first run-through is to looks back at what you’ve been spending. You can always adjust your spending habits later, but start with this.

We do not include dining out in the food category. We do this because buying food to cook at home needs to be treated differently than going out to eat, because the process of making adjustments to these two spending habits are completely different from each other.

Take what you’ve been spending on average every month and start with that number. While you can’t not eat, we’ll discuss how you can reduce expenses in this category in the next section.

Medical

Medical expenses are generally not planned, so they are difficult to budget for. They are also generally not optional, so if you budget too low then you are very likely to overspend in this category.

If you have chronic issues (we’re sorry to hear this) you might be able to look at what you’ve been spending and come up with a monthly average. If you are healthy (yay!) or have issues that are sporadic, you may have to come up with a very rough estimate for a monthly expense, knowing that on some months you will spend nothing, and on others you will outspend your budget.

Go high on this estimate, whatever your situation, because if you need it, it isn’t really optional. It’s much better to underspend and have more available for savings than to overspend and wonder where the money is going to come from.

Suggested sub-categories
· Health Insurance
· Doctor Visits
· Medication – Prescribed
· Vision (Glasses and Contacts)
· Other Medical

Taxes

If you work as a W2 employee your taxes are taken out of your paycheck by your employer. If, when you get your taxes done the following year, you either get a large refund or still owe the IRS or your state more money, you may wish to adjust your withholding. Your goal is to get only a very small refund for last year’s taxes.

As an employee, you can enter your gross pay into the “Income” category above, and then enter your various taxes in this category. That would be the most accurate way of doing it, although you do need to understand your pay check. (This isn’t a bad thing – if you’ve never really examined your paycheck to understand it, you are not alone. Many people don’t, and can’t be bothered.)

Conversely. you can simply use your net (take-home) pay for income and ignore this category. This is a much simpler way to handle your budgeting, but it will be harder to spot certain trends (like income and taxes) from one year to the next.)

Suggested sub-categories

· Federal Income Taxes
· FICA / Social Security
· State Income Tax
· Other Taxes

Sara Colley, Staff Writer
Financial Help Desk