I was looking for an easy budgeting strategy to help my teenage son as he manages his own money. I already knew how I had been budgeting for the past several years wasn't working. My plan has always been to pay myself first by contributing to my retirement accounts and then cross my fingers and hope I could pay all the bills for the month. When I heard about the 25 percent strategy to budgeting, I decided to test it out on our own family budget before recommending it to my 19-year-old son. A recent article by Credit.com outlined the simple approach to budgeting. The basic idea is to budget according to four different categories: taxes, housing, debts not including mortgage and living expenses. Twenty-five percent of the pretax monthly income gets spent on expenses in each of the four parts. I used the 25 percent strategy to help us budget for living on one income in case I lost my job due to company layoffs. Based on one income, we have $4,000 a month to cover all our expenses.
Paying taxes first
I liked the idea of putting money side first for taxes. I also included my company-sponsored healthcare deductions as part of the 25 percent allocated for taxes. Since my son is in a lower tax bracket, I suggested he take any remaining money after paying taxes and contribute to a Roth IRA. With the increase in health care premiums and taxes, I know the entire 25 percent of our income or $1,000 will vanish.
Budgeting for housing
The second budget category was for housing. Since our mortgage is about $900 a month, we had $100 leftover to pay for utilities. I was able to reduce our air-conditioning bill by having our unit professionally cleaned. I planned on taking an additional $100 to $200 a month out of the debt repayment category to cover our more expensive utility bills in the summertime.
Limiting our loan payments
I allocated another 25 percent of our income for loan payments and debts other than our mortgage. At this time, we have a $300 a month car loan payment. I used another $200 toward the housing costs, which left $500 a month for paying credit cards. Our credit card payments fluctuate each month, but I don't carry a balance. I used the remaining balance for medical bills and to pay extra toward our mortgage.
Living it up a little
The fourth category was for actual living expenses. We easily spent $1,000 a month on food, entertainment, gasoline, car and house maintenance, gifts and clothing. Knowing that I should only be spending a quarter of our income on "living expenses," helped keep me on track. We were able to cut our spending by about $200 a month so we could build up an emergency fund.
Although there are always unexpected expenses that pop up, it helped me to have a budget that guided me in spending the right amount of money on housing, transportation and food. My son's income will probably jump around a lot for the next 10 years as he gets more advanced training in his field. He expects to go from earning only about $150 a week at a part-time job to $1,000 a week once he gets promoted in a full-time job. His choice of condo, car and clothes will all be dictated by what his budget allows.
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