How to Set Up a Realistic Monthly Budget No. 1: Make a commitment to wealth building. If you are serious about becoming financially independent one day, you have to commit to getting richer - even if it's by one dollar a day. The way to incorporate wealth building into your budget is to allocate and segregate your money toward that objective. Let's say your income is $6,000 a month and you decide to save 10% of it. That means you would commit to directing the first $600 from your paycheck into savings. The best way to do that is to set up an automatic withdrawal that goes into a conservative, tax-deferred retirement account. Don't mingle your wealth-building fund with other accounts. And don't even think about using that fund for any other purpose whatsoever, including emergencies. No. 2: Create a start-over-again fund. Most financial planners recommend establishing an "emergency fund." As a general guideline, they recommend having three to six months' worth of living expenses in savings. Here's the problem with that... Three to six months' worth of living expenses won't do much for you if you have a real financial disaster. What if, for example, you woke up one day to find the company that has employed you for the last 20 years has shut its doors, and your pension plan is now worthless? You would have to start from scratch, right? That's why I call it your "start-over-again" (SOA) fund. How much do you need in your SOA fund? Only you can determine that. But a year's worth of living expenses would not be unreasonable. So, after making an allocation to your wealth-building fund, I recommend putting additional money into a separate tax-deferred retirement account. By keeping your SOA fund separate from your wealth-building fund, you'll decrease the likelihood of being tempted to borrow from Peter to pay Paul. And since it's unlikely you'll ever need to use the money in your SOA fund, having it eventually return to you tax-deferred is a big long-term advantage. Needless to say, your SOA fund is going to be substantial. This means, of course, that it may take you quite a while to accumulate as much money as you want in it. But the moment you start, you'll feel good... proud of yourself and increasingly financially secure. No. 3: Budget for necessary expenses. By necessary expenses, I mean housing, utilities, food, clothing and transportation. Figure out what those are going to be on a monthly basis. Then add 10% to allow for errors. Continuing with our example, let's say your income is $6,000 per month. You have committed to putting $600 into a wealth-building (retirement) account and another $400 into an SOA account, both tax-deferred. That leaves you with $5,000. You determine that the cost of your necessary expenses is $3,000 a month. You add 10% to that, giving you $3,300. Subtract $3,300 from the $5,000 and you are left with $1,700. No. 4: Anticipate necessary future expenses. There will always be additional expenses that you know are going to come up in the near future (one to seven years). These might include a new computer, repainting the house, gifts for Christmas and birthdays, and back-to-school shopping for the kids. These are expected expenses. So it's important to include them in your budget. For example, you expect to need a new (or, preferably, slightly used) car in two years. Your budget for necessary expenses includes enough money to cover the monthly cost. But you'll need another $2,400 for a one-time down payment. That means you need to put aside $100 a month, or $1,200 a year. And this brings your available monthly cash down to $1,600. No. 5: Plan for non-necessary expenses. Your non-necessary expenses include everything else that you expect to spend money on that month. In our example, that would be $1,600, minus another 10% (again, for safety), or $1,440. That $1,440 is what you have available to spend on entertainment (including cable TV), meals in restaurants, travel, hobbies and toys. In other words, everything else. The bad news is that this number is likely to be less than what you are currently spending on nonessentials. The good news is that you've already taken care of all of your anticipated expenses. You've also taken care of your wealth-building and SOA objectives. And you've made two 10% cushions in your budget for unexpected expenses and/or errors. So you can spend the entire $1,440 wad. No. 6: Make budget adjustments every month. It's a good idea to schedule time at the end of each month to plan the following month's budget. Here are the kinds of questions you might ask yourself... - Am I hosting any out-of-the-ordinary parties this month? If so, I'll need to increase my food budget by $X to account for extra groceries.
- Am I going to be driving more this month? Do I have to visit a relative out of town? Am I going to be traveling to a tennis tournament? If so, I'll need to increase my transportation budget by $Y.
- Will I be attending a friend's birthday dinner this month? If so, I'll need to increase my entertainment budget by $Z.
It should be very much like the current month's budget, with a few adjustments. But since you have taken the time to create a budget to begin with, there should be only minor surprises. Good investing, Mark | 
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