A Simple Guide to Not Going Broke Every Month

October 18th 2015

As a Forbes contributor who covers personal finance, you might think Laura Shin has always been money savvy. But Shin says budgeting was in no way her thing when she was in her 20s. In fact, she spent the decade amassing big debts, without a savings account or a plan to pay them off.

Shin turned 34 before she made her first budget. And, she says, that’s what turned her whole life around.

“People tend to groan when they think of their budgets, like it’s a diet or something,” Shin tells ATTN:. “But for me [making a budget] ended up being super empowering and enabled me to start achieving my goals.” Goals that include being a successful freelance journalist, which she now is—and one who writes about money management, at that.

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“I think without my mistakes, I’d have a lot less wisdom to impart,” Shin wrote in her ebook for Forbes, "The Millennial Game Plan: Career and Money and Secrets to Succeed in Today’s World." Luckily, she’s shared some of that wisdom with us.

The Basics

The first step is just to acknowledge what you spend your money on.

“If you are aware of your spending habits, you can probably see places to cut,” Shin says. “It helps you figure out what your real priorities are in terms of how you want to spend your life and money.”

Apps such as Mint and Level Money track your spending by category for you, making this part relatively easy. Shin explains you should see three broad types of expenses:

  1. Necessities
  2. “Financial priorities” (savings and debt payments)
  3. Discretionary

Necessities include things you can’t do without each month, such as housing and utilities, transportation, and groceries. Shin explains that, for most people, this category shouldn’t exceed more than 50 percent of your income.

At least 20 percent of your income goes to the next category: savings and debt payments. But it’s not as simple as that—there are four different types of savings you will likely want to build up. In order of which to build first, these types of savings are the curveball fund, emergency cushion, retirement, and goals. Shin recommends using a bank such as Ally or SmartyPig that allows you to have multiple subaccounts within your savings, so you can keep each type of savings distinct.

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The curveball fund is for those big, once-in-a-while expenses that you don’t want to work into your regular budget but still need a way to plan for. Those could include a car expense that comes up, an especially big health bill, or your dog needs to go to the vet, Shin explains. She recommends a curveball fund that adds up to about one month of your normal expenses.

The emergency cushion is for if, heaven forbid, something happens like you lose your job. Shin says the general guideline is to have enough to cover your necessities and debt payments for six months, but that’s really a matter of personal preference: some people feel fine with just three months saved, others want the security of nine. Then comes setting aside monthly savings for retirement. While you may feel retirement is a long way off, Shin points out that “the earlier you start, the easier it’s going to be. Any dollar saved in your 20s is going to be worth many more dollars in retirement than a dollar saved in your 40s or 50s.” 

And, finally, you may want to save for life goals like a new car, a house, or a vacation to Thailand.

Beach in Thailand

The last monthly spending category is the discretionary stuff, such as going out to eat, buying birthday presents, or concert tickets.

Since how much you plan to spend on these things likely varies throughout the year, rather than break each type of discretionary spending into a monthly budget, Shin recommends lumping together the amount you decide to set aside each month, multiplying that by 12, and dividing by 52 to give yourself a weekly allowance.

But that’s not all

If anyone, Shin knows just important maintaining a budget can be. But if all this seems like a lot, she also emphasizes that personal finances aren’t the be-all and end-all.

“When you find yourself overly concerned with what you don’t have, what you don’t earn, what you haven’t saved or what your neighbor has accomplished that you haven’t, be kind to yourself: Eat right, sleep, talk to your loved ones, be grateful for what you have, get out and appreciate nature, exercise, meditate, breath, laugh and do something nice for someone,” she writes in "The Millennial Game Plan."

“You’ll get over it and soon you’ll be on to the next thing.”

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