Making a Budget
This past memorial day weekend, I got a call from a friend. He had called to ask me for advice on what he described as “a serious problem.” Of course, I was interested, and knew that if I were to get a phone call from this person it had to be serious.
What’s Happening?
So we sit down, and while I’m waiting to hear about some crazy new disease this guy picked up or how he just gambled away his life playing online poker, I was underwhelmed when he said “I need to make a budget.” Now, being a person so grossly interested in finance, I was more than happy to take a look.
We compiled his monthly expenses, budgeted for purchases and expenses that don’t happen every month as well as built in a misc budget for unforeseen/unbudgetable costs.
The hardest part, although it shouldn’t have been, was the income. As someone on an hourly wage, and with hours that ranged from 30-40 hours a week, it was hard to make this budget perfect. However, perfection wasn’t the goal, we just needed to be close. Nonetheless, as almost any business, this one was largely seasonal, so there would be a windfall during a few short months and just enough to get by in the others. (Perhaps this is the reason the budget was so important).
Tallying it Up
After going over every cost, every expense, and budgeting for all the crazily costly car repairs etc that seem to come up just when you’ve found extra money in your pocket, my friend only HAD to spend about 60% of his annual income. What does that mean? He COULD save as much as 40% of his take home pay, which at his young age would easily make him a millionaire in no time.
Credit, Debt, Etc
More expensive than nights out on the town or lunches with the coworkers, interest costs came up as one of his largest (nonessential) expense. When I told him that he was paying some $80 a month to his credit card just to cover the interest, he was outraged. “$80! That’s a lot of money!” to which I replied “Yeah, and every month…almost $1000 a year.”
My Point
I know I’ve rambled but my point is simple. He thought he was screwed, he thought he couldn’t ever have any savings whatsoever and destined to be perpetually broke. It took just about an hour to go over EVERY item in his new BUDGET and see where he could save more, spend less, or generally cut back.
In doing so he will now be able to save as much as 40% of his annual income to put aside for the future. Granted, I don’t want him to starve himself, nor do I want him to work, work, work and never enjoy his time on this planet, but even with an entertainment budget of 15% of his income he can afford to save 1 out of every $4 coming in. Should he keep with the plan, he’ll be financially free. Had he never spent just 1 hour to make a budget, he’d probably live paycheck to paycheck for the rest of his life.
