Yes, you can make a personal budget in just 25 minutes

Shoppers ride escalators at a mall in the Mongkok district of Hong Kong on Dec. 12, 2020. PHOTO: BLOOMBERG

NEW YORK (BLOOMBERG) - Now is a great time to develop a serious budgeting habit. The next year might bring changes to your annual income and you should look at your finances now so that you are prepared for them.

A nation can run deficits; households should avoid them. People without budgets are more likely to fall into debt - and anxiety. But search for "how to create a budget" and most results are inadequate. Much advice focuses on those with low or no incomes, ignoring other barriers to budgeting such as unexpected layoffs and expenses. And almost everyone underestimates the rewards of budgeting.

Budgeting takes effort and psychological steel. A personal budget will not give you immediate gratification. It will not get you more money. But a budget will give you power. That is the main payoff for the tedious trouble of maintaining a budget.

Lots of Internet applications offer tips and motivation (for example, and The Balance) but I suggest budgeting free-hand. I started my budget with a piece of paper, a cup of coffee and some optimism. I eventually migrated it to my own Excel spreadsheet. You may be starting with debt hanging over your head. Put that debt, along with savings and wealth, to the side. Your budget is about cash flow.

Though most advice says start with income calculations, I say start with the most difficult stuff: Calculate what you want to spend and compare it with what you actually spend. The effect is almost magical. If you are overreaching, you will need to change - suggest cheaper activities to friends or enlist family to exchange cheaper gifts. The point of budgeting is getting a fact-based life.

On lined paper or a spreadsheet, itemise your spending into 17 categories and create two columns: what you think you spend each month, and what you actually spend. (For annual expenses, divide by 12.) This should take you 25 minutes after you gather your records. Here are the 17 categories:

• Housing, including rent or mortgage and property tax payments, utilities and home maintenance.

• Car expenses, including car payments, annual repairs and gas.

• Insurance, including home or renters' insurance and any annual disability and life insurance premiums. (Do not worry about health insurance if you get it through work; we are going to be looking at your post-deductions pay.)

• Groceries.

• Bare-bones necessities such as clothes, haircuts (leaving out any extras like neck massages), medical co-pays and prescriptions.

• Public transportation.

• Eating out. Count core costs only, like cheap lunches or takeout.

• Minimum payments on student loans.

• Childcare.

• The 5 per cent of your after-deductions salary that should go into a liquid emergency savings account. Emergency savings is for truly unexpected costs, such as when a tree falls on your roof.

• Essential travel to see relatives.

• Essential gifts for core people on birthdays and holidays.

• Basic entertainment, like date nights, fitness classes and books.

• Special-occasion dining out.

• Special travel and vacations.

• Special gifts for a major birthday, a stray wedding or a GoFundMe account for a sick co-worker.

• Special entertainment, such as concerts and theatre.

First note how much you think you spend on each category. Then figure out how much you actually spend by gathering your bank and credit card statements, looking for those sneaky auto-payments.

Now look at the gap between the two categories. Say you think you spend US$600 (S$800) a month on groceries but you really spend US$900. Drill down on whether the 30 per cent extra is caused by impulse buys. (It probably is, because the grocery store knows more about marketing than you do.) If you spend more on clothes than you remember, it is probably because you, like most people, wear only a fifth of your garments.

Next, calculate net income - that is what you get paid after employer deductions for things like health insurance, taxes and retirement contributions. (Retirement savings is a whole other subject, but most experts advise saving at least 10 per cent of your income, either through work or in an individual retirement account; for budgeting purposes, do not count this 10 per cent as take-home pay.)

You are spending too much on essential expenses (items one to 10) if they take up more than half of your take-home pay. As for the fun stuff (items 11 to 17) you know you are spending too much if you are not saving 5 per cent for emergencies or if you are putting the fun stuff on credit cards and not paying your balance in full every month.

Budgeting every month is tedious but it gets easier over time, and there is pleasure in mastering your budget. The key to success is making your budget flexible by adding and subtracting categories as you learn what you need to manage. But do not change too much, because comparing year to year helps you plan. Budgeting gives you control - something we sorely need in the roller coaster of the pandemic.

• The writer is the Schwartz Professor of Economics at the New School for Social Research. She is the co-author of Rescuing Retirement and a member of the board of directors of the Economic Policy Institute in the United States.

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