Welcome back to this week’s series on getting started with budgeting. Yesterday, I walked through my “process” for conducting a spending audit. Go read it if you missed it. It’s really just a fancy way of saying “figure out what you currently spend money on.”
Today’s step is more fun. The next step in the KISS budget is to figure out what you actually WANT to spend. However, that’s often easier said than done. I can’t tell you how many times I performed a very comprehensive spending audit, only to get totally overwhelmed by all of the data and stop entirely. So here’s my step by step breakdown of figuring out what you actually want to spend.
Step 1: Classify spending categories
Each category gets a prioritization level assignment. I don’t believe in making things complicated, so there are only three priority levels:
- Problem spending– this is any spending that is actually creating a financial problem for you. Going out to eat so often that you can’t save money or afford gas? That’s an area of problem spending. Is clothes shopping preventing you from saving for something you want or need? That’s an area of problem spending. If you’re already living on a shoestring budget, you may not have any areas of problem spending. But in that case, you’re probably also already on a budget!
- Nice to change– this label applies to any area where you think you could spend less, but it’s not currently impacting your ability to meet your financial goals. I often think of things like utilities and cable in this bucket, because most of us could probably do better in this area, but it’s also usually not a high problem area. Groceries is a category like this for me- I’m not likely to vastly overspend on groceries, but I could probably do better than I currently do.
- No change needed– this label applies to any area where you either can’t easily change the amount you are spending (i.e. debt, rent) or you don’t see this as a problem spending area (B. and I are both introverted, so spending on non-restaurant entertainment was never a problem in our house. Netflix all night? Yes please!)
Step 2: Pruning your problem spending
Note: If you don’t have any areas that you consider to be problem spending, skip to step three.
The next step is to look over your problem spending. What area needs the most work? Where are you overspending the most? Look at what percentage of your money is being spent on a given category*.
If you aren’t sure whether you’re spending too much in a given area, I’ve (very hesitantly) included some averages below (courtesy of Dave Ramsey). I just want to caveat these by saying that each individual situation is different, so take your needs, preferences and cost of living into account for each of these averages.
- Rent/Mortgage/Utilities: 30-35%
- Childcare-: Dave Ramsey suggests 10%. I think this is a joke. About 20% of our monthly spending is spent on childcare
- Groceries/Restaurant/Household products: 10-15%
- Transportation: 10-15%
- Insurance: 10-25% (note- this includes home, auto, life, short-term and long-term disability, long-term care insurance, health insurance, etc.)
- Personal care: 10-15%
- Non-restaurant entertainment/Miscellaneous: 5-10%
- Doctor/Vet: 5-10%
Once you’ve decided where you’re overspending, your first goal is to work on one problem area only (if you have the luxury of being able to gradually work your way into budgeting).
See, humans are funny, in that we routinely underestimate a) how hard a task is going to be and b) how well we’ll be able to sustain behavior over a long period of time. So we may think “oh, hey, cutting out all clothes shopping and eating out is going to be fine. I can do that, it won’t be that hard.” But after a few weeks, reality sets in, we get busy, we get bored, it rains for three weeks straight and suddenly we’re back at McDonalds with fifteen shopping bags in tow. Because when things get stressful, our control breaks down and we’re right back into old, comforting, familiar routines.
It is much easier to change behaviors if you focus on one behavior at a time. So in this case, pick one behavior that you’re going to change. Maybe it’s eating out. Maybe it’s going to see movies. Maybe it’s going shopping on the weekend because you’re bored. Pick one thing and work on only that, for at least a month. The idea behind this method is that after a month, you’ll have replaced a not-so-great financial habit with a better financial habit. And once behavior becomes habit, it’s much easier to a) stick to existing habits and b) work on new habits. Finally, you slowly add new goals (no more than one each month) until your problem spending has been addressed.
Step 3: Look for ways to save on “nice to change” budget items
This step can happen simultaneously with step two, but if you have a lot of problem spending areas to tackle (3+), I wouldn’t recommend that. It will start to feel really overwhelming and not very simple any more, which defeats the entire purpose of this budgeting method. If you need ideas on how to save money for certain budget categories, I highly recommend Google.
So there you have it- the second phase of the KISS budget. The third, and final, installment will be tomorrow and I’ll be talking about how to track your spending throughout the month.
*If you aren’t mathematically inclined- take the amount of money you spent on a particular budget category and divide it by the total amount of money you spent in a month. Then multiply times 100 and you’ve got your percentage of monthly spending! For example: I spent $500 on groceries and $5000 overall a month. 500/5000) * 100 = 10%. So 10% of my money each month gets spent on groceries.