Budgeting - Common Questions
The project may not have covered the questions you wanted answered. I'm including the most common ones below, and I'll try to keep adding to the list as questions come in.
You can submit questions here.
Questions
1. I still feel like something's missing. It's great to keep track and cut costs, but how do I know what to spend money on?
You're talking about investing, which is how to make decisions about how to spend your money. My investing lesson will cover this.
2. Are there hidden costs that I might not be considering when considering how much I'm spending?
There's one common pitfall I see a lot of people make when they're trying to keep track of spending: not keeping track of the total cost of an activity.
For example, I went with some friends to the Museum of Modern Art. The ticket cost $25, but the total cost was really $39.
Why? I had to take the bus to get there ($2.25) and we got food and drinks afterwards (my cut was $11.75 including tax and tip). So I made sure to record the cost of the entire experience. It's like including shipping and taxes when you bid on Ebay.
When you're deciding to go to a baseball game, buy a new couch, or mail-order a kid from Sweden, think about the entire cost it will take. This may include shipping, legal, taxes, and transportation costs.
You can make other types of "hidden" costs--costs that you forget about or are unaware of--visible by keeping track of them. So keep track of every cost. If you did the project, you should be able to see every cost automatically in Mint. If you're not comfortable keeping everything in mint, think about every possible place your money is flowing out of: your checkbook, credit cards, the cash on your desk, etc. and make sure to look at those records.
The worst hidden costs that live in plain sight are recurring costs. Anytime you sign up for a subscription service like Spotify, the New York Times, or Netflix, you're committing to giving away that money for the rest of your life unless you manually stop the service. It can be a pain to keep track of all of these (although I do my best) and it's easy to forget that you're paying.
The best defense I've found: the monthly expense review. I've caught some recurring charges that I thought I had stopped by checking my credit card bill monthly. For example, there were two separate times that I clicked cancel on the https://okayrelax.com/ website, but they still charged me monthly afterwards. I don't normally throw companies under the bus, but OKRelax has done it twice and they've lost my business at this point.
This isn't to say that all recurring costs are bad! I'm very happy that I get a strong internet connection every month and access to a gym. Just be mindful of what you're paying and make sure that you're getting what you want for the money you pay.
3. How do I know if I can afford a trip, big purchase, etc.?
With my system: check your disposable income list and see if you have enough saved up in your rollover account.
Otherwise: take a look at your budget and total up your monthly expenses. Take a look at the amount you've saved up in your checking account and your savings elsewhere. Think about how much would be left after you pay for the whole trip (remember to guesstimate your hidden costs). Keep your long-term saving goals in mind and see whether there's enough left over to pay for the trip.
How many times over could you cover your monthly expenses with what's left? It comes down to what you're comfortable with.
4. I would love advising on what to do with the money I’m saving. What’s an IRA, is it worth opening one up, etc. At what point should I start buying stock/investing? Where should I start? Is there something else I should be doing with my savings?
I'll be covering this in my Saving lesson.
5. How much is healthy be saving every month? Every day? Every year?
20% of every paycheck, pre-tax, is a good rough rule of thumb. There's some more detail here, which I'll cover in my Retirement lesson.
6. Are there loopholes to know about when it comes to credit cards; how do I choose the right card?
I'll be covering this in my Credit cards lesson.
7. What about bonuses? How do those go in my budget?
I like two approaches here.
a) Guess what your overall bonus would be for the year. Divide that by 26 (26 biweekly paychecks for 52 weeks a year) to get to that portion of the bonus per paycheck. Stick that into revenue--and make sure you enter the taxes you pay on it as well.
b) Pretend you never get bonuses. Whenever you do get a bonus, stick it directly into savings or give your disposable income a boost (very easy to do if you did the project and track your disposable income).