Budgeting 101: Necessities

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I earlier wrote about the money management system I use in budgeting our household income and I remember a friend of mine, after reading my post, confessed that she has not made a list of her family’s household expenses ever because, as she mildly puts it, she’s afraid to find out the truth.  😀 Change starts when we face and accept the truth and if we will continue to live day by day without knowing or minding where we are right now and where we want to be some day, then I don’t think we will ever move forward.  Not having a plan or goal is like wandering comfortably in a familiar place and never wanting to explore and it is important that we set goals so we can focus on doing things that are most important to us and not get sidetracked with trivial stuff.

The JARS money management system works by allocating your total household income into the following categories:  Necessities (50%) + Long-term Savings for Spending (10%) + Financial Freedom Account (10%) + Education (10%) + Give (10%) + Play (10%) = 100%.  I tweaked the system to match our family’s lifestyle and you can, too, or choose another system that will work best for you.  For those interested, I will try to write about each of these categories and share how I personally determine and allocate our household expenses and savings into each category.  I will start with necessities because these are the expenses that regularly come out of our pockets. Grab a piece of paper and a pen (or open an excel file :D), if you like, and let us face the truth, shall we? 😀

The Necessities

According to the The Free Dictionary, necessity is something that is, well, necessary or indispensable.  Now, depending on each family’s income and lifestyle, these needs would vary from household to household.

Food: These are the food that we prepare and eat or drink at home (and those that we bring to or pay for at work or school).  Dining-out expenses go to my Play budget which I will also write about in another post some time.

Shelter: Mortgage or rent, property taxes, condo or community association fees, and other home-related expenses.

Clothing: Clothes, shoes, bags, and accessories.  This one is tricky because some people are spending more than necessary on these items.  What I personally do is I set a budget limit on clothing and if I want to buy more clothes than I actually need, I sacrifice a portion of my Play budget.  When you find yourself itching to buy more stuff and you can’t fight it or you feel that you deserve it, you may choose to sacrifice your allocation for, let’s say, ‘savings’ or ‘education’ but always ask yourself first which one is more important to you at that particular time before deciding.

Groceries: Other household expenses such as those for hygiene or personal care, cleaning materials, medicines, etc.

Insurance and Pensions: Life, home, disability, health, car, employment, and what have you.

Transportation: Gas, bus and train tickets, school bus for the kids, car registration and maintenance expenses.

Utilities: Electricity, heating, water, garbage, home phone, cellphones, internet, and cable TV.  I have a friend who thinks that TV is not a necessity.  We rarely watch TV, too, except for the news and some shows and so we maintain the most basic package.  If you do not watch TV at all or if you do not need a home phone since everyone in the family already owns a cellphone, then you have less expenses to worry about. 🙂

Home security system:  We had one installed when Danny started to work out of town and I once considered cancelling our account because I feel pretty much safe in our neighborhood but then I recently woke up to my daughter sleepwalking and so yes, this is definitely a necessity.

Child care:  If you have kids younger than 12 and you need to make a living. You wouldn’t want your kids left alone by themselves at home in case of emergencies they couldn’t handle.

Loans: Any existing loans you have – student loan, car loan, credit card outstanding balances, etc.

These are all I can think of right now. If I left something out, please do leave a comment so I can update my list. 🙂

Now, the truth. 😀 Add up all your expenses that occur regularly or monthly.  For an irregular expense or that which only occur annually, estimate the cost and divide it into 12 months so you can set aside the money and you do not have to worry about it when it is due.   Then, add all these up and check if it is within your ‘necessities’ allocation.  For example, if your previous month’s household income (less taxes) is $5,000 and you allocated 50% to ‘necessities’, your expenses for the current month (including credit card purchases) should not be more than $2,500.  Adjust your allocations, if you must, according to your current needs and situation.  We will work on pruning unnecessary expenses or our bargaining skills next time 😀 but for now, congratulations, you are one step closer to organizing your finances! 🙂

NOTE: If you feel that the above expenses overwhelm you and your budget, you may choose to just list down the expenses that strictly come out of your pockets monthly. Set aside (for now) your list of expenses that occur annually or quarterly, say, your property taxes, condo fees, car registration or maintenance, and we will talk about ‘Savings for Future Expenses’ later.

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