The One Number You Should Absolutely Know, Even If You Hate Budgeting
Budgeting tends to be a topic where people have widely varying opinions. Some people love doing it, and consider a monthly budget to be an essential part of their financial set-up. Others hate budgeting and the thought of tracking their spending, either due to a lack of interest, or a lack of motivation. While I’m a huge proponent for tracking your expenses and zero-sum budgeting, I understand that it can seem daunting at first. Many people don’t dedicate so much time to organizing their finances.
Wherever you happen to fall on this spectrum of budgeting, I think we can all agree that it’s important to know how much income you’re bringing in, and how much of your money is being spent.
Another essential number that you need to know in order to have your finances under control is the amount of your baseline expenses. This is also commonly referred to as a “bare-bones” budget. The concept is simple: it’s the most stripped down version of your monthly expenses as possible. This means you figure out the costs of your necessities, without any of your other expenses.
How to Create a “Bare Bones” Budget
It shouldn’t take very long to figure out the cost of your core expenses. In fact, it only takes a few steps.
1. Take a look at your previous month’s spending by reviewing your bank statements. For an even more accurate picture of your spending, take the last three months, and then average them out.
2. Categorize your expenses into broad categories such as Rent, Groceries, Utilities, etc.
3. Tally up the amounts for each category.
4. Once you have your list of categories, go down the list one by one and carefully analyze whether it’s a necessity, or whether it can be cut. You want to cut everything possible; this list should include only your true core expenses. For example, if you lost your job, or had a major medical emergency, would you still go out to eat at restaurants every week? Probably not.
Here’s an example of what our “bare bones” budget looks like:
- Rent & Insurance
- Auto Insurance (we currently have two cars, but in a dire emergency we’d sell one)
- Utilities (cell phone, electricity, internet)
- Student Loan (minimum payment)
- Home Supplies/Pets (we’d cut this back as much as possible, but would still need necessities like toilet paper, dog food, etc.)
This list will look different for everyone. Maybe in a dire situation, you’d decide to ditch your car, and maybe even your cell phone. You might have a couple other expenses that you consider necessities in your own life. The key is to challenge everything in your budget, and cut as much as possible for this exercise.
Lastly, once you’ve figured out your list of core expenses, tally them all up and you’ve now established your baseline.
Why It’s Important to Know Your Baseline Cost
It’s essential to go through this exercise for a few reasons. First, you can compare this baseline to the income you’re bringing in to see if you’re making enough to make ends meet. It also helps you establish what amount to save in an emergency fund. Building up at least a three-month emergency fund (three times your baseline costs) is one of the most important steps to building financial stability. It helps protect you in the event of job loss, health problems, and any number of other unforeseen financial pitfalls.
Another benefit is that it helps show you how many of your expenses are non-necessities, and could be cut if needed. A lot of people say they have no money to save, but by stripping away the excess, you’re able to see opportunities to save more clearly.
Even if you hate traditional budgeting, take some time to go through and figure out this number. It’ll help you feel more secure in your financial situation, and help give you more direction in the savings targets you’re aiming for.
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