For even the most mathematical and organized
people, balancing a budget can be time-consuming and tedious. Fortunately,
there is a relatively pain-free approach to the task that will help you divide
your paycheck and cover your entire list of expenses simply: the 25% budget.
Through this process, you’ll divide your
pre-tax paycheck into four equal parts: debts, taxes, housing and living
expenses. It’s a great starter budget for people who have never busted out the
pencil and paper before, and it is an easy way to manage your money.
The First Quarter: Taxes
There really is no way around this one. For
moderate earners, 25% is a good ballpark figure for local assessments and
federal taxes, including Medicare and Social Security.
The Second Quarter: Housing
Your monthly housing payments should not be
more than a quarter of your monthly pre-tax salary, whether you rent or own.
The Third Quarter: Debt
If you are in debt, commit to spending
about 25% of your paycheck each month to carve your way out of it.
The Final Quarter: Living Expenses
Your taxes, debt and housing are taken care
of. This last 25% of your paycheck is going to go toward everything else,
including feeding an emergency savings stash that you could live on for at
least six months should you lose your job.
The reaction of most people when they hear
about this rule is that they could not possibly live on 25% of their gross
salary. If that’s your reaction too, it is time to take a good hard look at the
way you are spending your money and how you can change the allocations you can
control, which is everything but taxes.
Write down these expenses to get on track
and stay there. Record all the money you spend for two months before you
reevaluate your budget and how you will spend your money. You may realize you
can afford to put more towards debt every month, or that you can afford to invest
in a new car, or you may discover that you are living
beyond your means. Maybe you could cut down on frivolous spending, like
your weekly take-out habit or magazine subscriptions? Maybe you should search
for a roommate or downsize your dwelling? Maybe you will have to put a large upcoming
purchase on hold for a few months? The point is to see how your long list of
expenses fit together, to establish limits for every category and decide what
trade-offs you are willing to make to work within your budget.