Thursday, March 20, 2008

Budget backwards with priorities

My budget looks neat and tidy right? It's pretty easy to see very definite percentages for our living expenses. It appears that we feel right into line for most categories.

But how'd we do it? Truth is we backwards budgeted. We prioritized everything backwards. We took our gross salary and said we're saving $x for retirement. Before taxes, before everything else. Second, we said we have to pay $x for taxes. That left us with $x.

From there we decided a house mortgage, property taxes, insurance. Then we built in stuff like eating out, cable, internet, cell phones, etc. So we listed things we wanted based on priority.

Thus, if having a nice car is important, it can be built into the budget. Say $500 car payment, can be actual payment or savings into account. Things like that can be "budgeted" for.

This way you prioritze what's important and what can be the first to go if times get lean. Often times people just build budgets according to what they want. They don't stop and say I have to live off of 75% because 10% goes to tithe, 15% goes to retirement, then from the 75% that pays taxes, then the mortgage, food, then all other "wants".

We did that by backwards budgeting. We kept our house higher than normal ~30% because we were young and starting out. Our incomes would grow and it has. But we also kept it high because a nice house was more important than a nice car or eating out. But for some travelling and a smaller home might be important.

So you "tweak" the budget as you see fit. But this way you build it with clear goals. There is no other way than 15% to retirement and 10% to tithe. Then you can't buy a house with 50% of income or a car with 25% of income. To prioritize your needs versus wants.

I've found this has worked for 10 years. We used to prioritize housing over retirement. But we made so little and even renting took up nearly 50% of our incomes, that we had no choice. But we knew it was a priority for us.

So try it. Backwards budget your annual income. And see where your priorties lie.

1 comment:

change is a good thing said...

This is pretty much what I do too and I really like it, it helps make sure you meet certain goals first, and that you don't overspend in other areas. Very well explained in your post! :)