The first month I tested my 15-minute budget, it saved me $2,000. Now, a few years later, it still keeps me on my toes. Here’s the logic behind it and how to get yourself set up to start staying on top of your budget.
Most budgets look backwards. How much did we spend on gas last month? What was our grocery bill? How often did we eat out? These numbers are then used to project future spending.
There are three problems with this scenario: First, very few expenses are consistent month to month; many vary widely. Second, there are always unexpected bills. Third, backward-looking budgets require a lot of upkeep to check if this month’s numbers match up with last month’s.
Is that practical? Me thinks not.
Enter Bargain Babe’s forward-looking budget. It solves all three of the above problems and takes just 15 minutes to set up. Surely, you can stop watching “Dancing With the Stars” for long enough to get your financial house in order.
The Secret Formula
-Income minus savings, minus obligations, minus irregular expenses = Discretionary spending.
-Income is your monthly take-home (after taxes) pay. Note: This budget works best for folks with consistent incomes.
-Savings are the total of whatever you put into your IRA, 401-k, or savings account each month.
-Obligations are expenses you are obligated to pay each month. Mine include a mortgage, utilities, Internet bill, cell phone service, prescriptions, insurance, and my subscription to the New York Times.
-Irregular expenses are bills that come up semi-regularly, like car insurance, dental visits, gifts, charitable donations, and vacations. Total what you spent on these categories last year and divide by 12. This number, the one twelfth, is what you need to set aside each month into a special account. That way, when an irregular expense comes up you have the cash on hand.
-Everything else, such as gas, clothing, bus fare, meals out, movie tickets, groceries, toiletries, hair cuts, and home maintenance, comes out of your discretionary spending dollars.
Calculating Discretionary Income
Say your take home pay is $3,000 a month. You save $300 each month. Your obligations total $1,800. Your monthly set aside for irregular expenses comes to $350. Crunch the numbers using the secret formula…
$3,000 – $300 – $1,800 – $350 = $550 discretionary dollars each month.
If you are married, have a partner, or share expenses with one other person, I suggest dividing the discretionary dollars in two. That way, each person has their own pot of money to spend as they like. Dividing your discretionary income in half results in fewer arguments about what is a waste and what has worth.
Staying on Track
Now that you’ve set up your 15-minute budget, it’s a cinch to use during the month. Use Mint’s real-time money tracking system to keep track of how you spend your discretionary dollars. Each time you make a purchase, subtract it from the total discretionary dollars you have for the month.
Now you know exactly how much money you have left to spend at any given time.
The incredible upside to this budget (aside from the almost zero time commitment) is that you are not only acutely aware of how much you are spending, but you also know how close you are to running out of money. It makes it a lot easier to say no.
Julia Scott writes the money-saving blog, Bargain Babe, and enjoys saying no.