One of the most important tools to achieve financial independence and early retirement (the concept known as ‘FIRE’ where I am mostly focused on the ‘FI’ part) is to have a great budget – and to stick to it. In the following, I will show you how to make a good budget.
Your budget should consist of two overall categories:
- Your income
- Your expenses
Your income should always be your take-home income (i.e. after taxes – the money that you have available on your account).
Your expenses should include all of the money that you spend in a given month. The expenses obviously makes up the most of your budget as most people have few revenue streams, but have many different expenses. I believe in three categories of expenses your budget should have:
- Recurring, need to have expenses (e.g. housing, food, insurance etc.)
- Recurring, nice to have expenses (e.g. TV subscriptions, cleaning, gifts etc.)
- Unforeseen, one-off expenses (e.g. repair/replacement of electronics, lawyers etc.)
The distinction between need to have and nice to have expenses is quite important, since one of them can be easily cut out of your budget and increase your savings rate, while the other can never be compromised to ensure your health and a decent living standard. I believe that you should always build a buffer in your budget for unpredictable, one-off expenses, because they will for sure happen.
Before we get to our actual budget, I would like to give you a few tips on how to best incorporate it in your daily life:
- Split everything into monthly expenses: I have all my expenses on a monthly basis. For example, I know that I will be giving certain birthday and Christmas gifts every year. Thus, I have an expense item called ‘gifts’, where I save 1/12 every month of what I expect to give of gifts every year.
- Set up an account for each group of expenses: Depending on how digital your bank is, I would suggest setting up an account for each group of expenses (e.g. ‘gifts’) to get an overview of how much money you have for certain things. Don’t do this if the bank charges you a fee per account you have.
- Use one master account: Set up one account for incoming salary, payment of bills and transfer to expense accounts mentioned in point 2
If you use cash and do not have a bank that offers good online/digital solutions, then I would suggest having different envelopes with the assigned cash instead.
Since November 2018, my wife and I have combined our finances. This also means that what used to be “my budget” is now “our budget”. Below you will find our budget will all of our relevant monthly expenses:
|INCOME AFTER TAX|
|Take-home pay from job||81,092||12,476|
|Need to have expenses||26,313||4,048|
|Rent, real estate tax and utilities||22,859||3,517|
|Internet and phone (company paid)||0||0|
|Nice to have expenses||13,172||2,026|
|Living expenses (most non-food groceries) and entertainment (restaurants etc.)||3,500||538|
|Furniture and other household items||1,000||154|
|Unforeseen, one-off expenses||400||62|
|Emergency expense savings||400||62|
As you can see, our savings rate is approximately 51% per month based on the budget. However, there’s a few things not reflected in the budget:
- We expect to get kids within the next few years and that will of course add additional expenses
- I do not include the income from this blog in the overview – and I hope it might increase over time
It is impossible to predict our savings rate each month, so this should be seen as our best guesstimate, but make sure to follow our monthly journey reports to see how we track.
Are you tracking your savings rate? If not, you should get started right away!