Here we describe many reasons why you need a home budget to improve your financial condition. We all need to be able to assess where we are and where we want to be financially. A budget helps us lay out a framework for how we should use our money. A good budget will include our goals and ambitions.
10 Reasons Why (Your Goals)
There are numerous reasons we may have for home budgeting, including:
- Getting out of debt so we can quit bleeding money. Are your credit cards
- Quit living paycheck to paycheck and having the stress that comes with it
- Saving money for a big purchase (like a home, a car, a vacation, an expensive hobby or any number of other big ticket items)
- Saving for education whether it be your education or for a member of your family
- It may be about building an emergency fund so we are ready for the challenges life will inevitably throw at us. This can also reduce our anxiety about money or a lack thereof.
- We may be saving up money so we can afford to have a family whether that be a child, children or pets.
- Maybe you want to start a business but need startup capital to get going
- You may want to invest more than you currently do or get into new investments, like real estate
- Changing your life so you can be financially independent may be the ambition that excites you.
- Increasing the amount you donate, because giving is one of the best ways we can increase ours and others happiness
Many of us will likely choose to engage a number of these goals or maybe even all of them. There are many strategies for reaching our goals. Some may choose the checklist approach where they focus on one goal at a time and check it off when complete. Others will want to see progress across multiple goals at a time. Regardless of what you aim to accomplish, a home budget can help you lay out a roadmap to reaching our goals.
Do you need a home budget?
Do you need a home budget to be able to accomplish your goals? I am sure there are many people that have reached the above goals without one. However, having a budget will allow you to be strategic about what you want to do and how to get there. It can help you chart how well you are doing on your desired path. If you find things are not going as planned, you can use your budget to help correct course. If things are going well, you may be able to add a new goal you were not anticipating or maybe one that seemed far out on the horizon. Regardless, having a budget is a tool we use to help us navigate our financial journey.
Can you get by without a home budget?
We probably could have done a lot of what we accomplished financially without our budget. (Oops, I wasn’t supposed to say that.) We have no doubt the road would have been more difficult and less successful without one. Our budget allowed us to understand how much money we were wasting on things that didn’t serve our goals. Likely, we would have further delayed buying our first home and having our first child without a home budget (largely because it would have taken us longer to save). Alternatively, we could have done either or both too early and been in real bad shape financially. We do wonder how much more debt we would have if we had foregone the budgeting route.
Most people find a way to make it work without a budget, because they have no other choice. We made it without one for a while, but it wasn’t pretty. The money we brought in went right back out the door and we had little savings to show for it. It was a very frustrating time in our lives.
If you are reading our posts, there is a strong chance that you want to do better than just getting by. You probably want to live the life you want, instead of the one that everyone else seems to live. If that’s a good assumption, you are in the same boat as us! In that case, we highly recommend a budget. Do you want to live the life in debt model, have way more money coming in than you spend or you just like to roll the dice a little more? Well, maybe a budget is for you.
Why we home budget…Our Financial Disaster Story
Racking Up Debt
Tell me if you have heard this one before…
Before starting our home budget, we had a strong motivating force pushing us to manage our money better. After graduating from college, we had a lot of student loan debt. When I say a lot, I mean roughly $100,000 worth of combined household student loan debt. Maybe we are underselling what “a lot” means when the average graduate has $37,574 with of it, according to the Education Data Initiative (https://educationdata.org/average-student-loan-debt). The interesting thing is we both worked while in school, we had a mediocre apartment unit and we weren’t lavish spenders. But, when one of you gets multiple degrees and the other pays out-of-state tuition, well the bills add up.
Low Starting Salary
Upon graduation, the economy was not great. It was taking graduates a long time to find jobs. It was beyond the three to six months that the University of Washington estimated in 2021 (https://www.washington.edu/doit/what-can-students-do-improve-their-chances-finding-employment-after-college). I was fortunate to have a paying internship that was allowed to carry on for a few months after graduation. My wife was just starting her career and we were fortunate that she was able to find a job as I finished school. Collectively, the pay was not great. So we were stuck in low paying jobs, looking for ways to scrimp on what we were spending everywhere else, just to pay student loans.
Debt Payments
Our beautiful financial disaster left us with $1,220 per month in debt payments. That is only around $200 less per month than the average monthly mortgage payment in the United State in 2021 per Bankrate (https://www.bankrate.com/mortgages/average-monthly-mortgage-payment)! When you first leave school and your combined wages are less than your student loan debt, you are going to feel hefty financial discomfort. I am sure many of you reading this post know exactly what this feels like.
Some people suggested we go the income repayment plan route. We opted to not to do that, as our wages would eventually grow beyond the benefit of those plans. By dragging out the payments, we would end up paying a lot more money in interest. Personally, we felt our degrees were expensive enough without all the interest. We also were not planning on needing student loan forgiveness, so it made more sense to grit it out and pay the full bill every month.
Owning Up
Needless to say, some of this was out of our control. For example, the time of our graduation relative to the strength of the economy was not ideal. The rest was of our own doing. We opted for careers that require degrees. The student loans were now our burden. As a result, the path we were on was going to be a challenge. We had to own up to that. How we navigated that path would play a critical role in whether we lived the sort of life we wanted. This is where the home budget came into our lives.
What Home Budgeting Taught Us
We have two high-level home budgeting lessons to share with you. Our story might not align with yours perfectly. However, we believe that these primary lessons will help many of you. As we expand the articles on this website we will delve deeper into these two areas.
Most of us have financial goals. We also have barriers and opportunities to reaching them. Once we come to terms with what is in our control versus what is out of our control, we can start making financial headway. It often is not the best use of time worrying about what we cannot control. What we can control financially often comes in the form of opportunities and barriers. These live within our income and expenses. It really is that simple at a high level. There are of course nuances, but if you are just getting started it’s an easy way to jump into home budgeting.
Salary
You are not likely to make significant salary jumps right out of school (in a corporate job) large enough to have a huge impact on your finances. There are of course people who are able to do this in part due to their field of work, their capabilities and their drive. Unless you have all three working for you, it will be hard to make huge leaps in pay.
Let’s say you make the mean starting salary out of college in 2022. Per the National Association of Colleges and Employers (NACE) that would be $58,862 per year (https://www.naceweb.org/job-market/compensation/salary-projections-for-class-of-2022-bachelors-grads-a-mixed-bag/). If are hoping a raise will make a life changing difference, it would be good to know how much to expect. The annual average for raises is around 3% (*), per Investopedia (https://www.investopedia.com/articles/personal-finance/090415/salary-secrets-what-considered-big-raise.asp). With a 3% raise on a $58,862 salary you are looking at $1,765.86 in increased wages the next year.
That $1,765.86 amount is before all the taxes you will pay, including things like the “employment tax” (6.2% for Social Security & 1.45% Medicare up until wage limit), federal tax and state tax (if your state taxes your income). After all of that, you are looking at significantly less going into your pocket. We haven’t even taken into account that as inflation increases, the dollars you earn have less buying power.
The Takeaway
The too long, didn’t read (TLDR) takeaway? You have to see a promotion level quality raise for it to significantly alter your budget. Increasing you income generally takes time, so if you want to see big home budget gains, expenses should likely be your initial target.
We didn’t talk about other forms of income, as a majority of people are working W-2 and 1099 jobs. In other words, you are earning income on a standard job in the form of wages or salary. These are forms of earnings.
* With inflation running high, raises are quite a bit higher than normal, but cost of living increases often negate the benefits unless you are getting a raise higher than inflation. This is a bit of an oversimplification. But for the purpose of this example, let’s keep it simple and we will cover the wage to cost of living discussion for a future article.
Expenses
We tried to take out the lowest amount of loans possible by working through college. Our rent was affordable. We did not buy a lot of nice or new things. Our furnishings were mostly hand-me-downs. We tried to cook our own meals as often as possible. Admittedly working 70 hours per week between school and our jobs put a strain on affordable meals. Our entertainment is mostly a low cost subscription to Netflix. Despite all of these conservative measures, we were still spending a lot on schooling. But, if we had not skimped where we could, we would be in a more dire place right out of school.
In hindsight, we probably would have developed a better approach to education. You really don’t realize how much student loan debt and the accompanying (relatively high) interest rate will hit your wallet until you are living it. Some will say that you know what you were getting into when you took out the loans. Sure you know the terms, but most of us are not financially savvy coming out of school. We don’t truly comprehend the weight of those loans.
The Takeaway
Our advice is to skimp early and often. If you choose to rack up the student loans (or other forms of debt) like we did, do yourself a favor and not rack up a lot of other debt. You can use your home budget to target debt reduction so you can remove it as a barrier to your other goals.
Home Budget Conclusion: Gain Control of Your Money!
One of the main reasons why people need to have a home budget is to gain control of their money. Each of us has to make our own decisions and live with them. We personally chose the budgeting life so we could exhibit control over our money. A budget gives you a clear understanding of how much money you have coming in and going out each month. This information is crucial in helping you make informed decisions about spending and saving. Without a budget, it’s easy to overspend and fall into debt. A budget can also help you identify areas where you can cut back on unnecessary expenses and redirect that money to more important financial goals. We would much rather tell our money what to do for us than have money controlling what we do.