How To Budget Your Money


Yesterday I was perusing books in a local store and came across an old “classic” in business literature that I’d read years ago (in English). The central idea on the back of the book was “if you haven’t learned about how to handle money, then how are you going to know how to handle money?”

I have zero interest in becoming a “business” author but nonetheless the point is valid – if nobody teaches you something, then it can be hard to learn on your own. If you never learn to wind surf, or spin wool, or dance the cha-cha, then it’s okay. But we all use money on a daily basis.

The vast majority of Romanians whom I know are in a fixed situation – they receive X income per month (from the government or from their salary or both). What follows is my budget advice for these kinds of people. Others, such as property owners, freelance workers (such as yours truly!) and governments fall under the scope of something else.

The problem is this – you make X lei per month (after taxes) and at the end of the month you have little to nothing left. Short of a miracle, there is no way to increase your income (salary raise, etc). So what can you do?

Actually, two things. The first is reach the goal of having extra money in your pocket at the end of the month. The second is what to do with that “extra” money, which I’ll write about separately.

To reach the first goal, what I do is break down my expenditures (Rom: cheltuieli) into three categories: Absolutely Mandatory, Almost Mandatory and Everything Else.

Where you’re living is going to be the bulk of your Absolutely Mandatory expenditures, whether that’s the rent, the mortgage or something else. Other related expenses like the bloc maintenance fee (Rom: intretinere) goes under this category. Water is also included as you cannot store water in your body and therefore you need a clean, fresh, regular supply to live.

Example:

Absolutely Mandatory
Rent
Intretinere
Electricity
Water

.
Now here’s why this category is so vitally important – if your combined totals for this category are equal to or more than 50% of your income, you are in deep trouble. You need to find a new situation immediately.

Lifelong poverty always, always, always comes as a result of Absolutely Mandatory expenditures superseding that 50% of income threshold.

However many things are almost mandatory.

Almost Mandatory
Food
Heat/Cooling
Internet
Telephone

.
You might wonder why food is only “almost mandatory” and not in the first category. I’ll get into that here below.

Some people have a situation where heating/cooling is from the bloc and you can’t control it. It’s the kinds of situations where you use your own separate devices that fall under the category of “almost mandatory”.

Adding up ALL your expenditures from the first two categories, if you’re under 50% of your total income then you’re in great shape.

It is usually extremely difficult (or impossible) to change the expenditures in the Absolutely Mandatory category. Your rent is your rent, the maintenance fee is what it is, etcetera. Most people can easily “budget” for these items since they’re usually the same every month anyway.

Where you will find the most rewards is in hacking at the costs of the items in the second category.

Some things – like how to find a better price for internet (or dropping it all together) – are relatively easy. Company A offers X price and Company B offers Y price. You look, compare and choose the one that’s affordable to you. The same is true for telephone service.

Food however is where people often lose track as almost nobody buys food just once per month. You “buy” telephone service, internet and many other things once a month but not food. Therefore in drips and drabs, here and there, money flows out of your pocket and goes to buying food.

The easiest thing to do (especially if you’re lazy, like I am) is just save all those million receipts (Rom: bon fiscal) that you might ordinarily throw away. Put them in a jar and at the end of the month, add up the totals.

It is mandatory to know what you are spending if you are ever going to budget money. Period. That’s just the way it is, folks.

There are about a million ways to cutting back on food costs (without suffering) and you can use Senor Google for those. I personally believe a person can eat well on 100 lei a month in Romania and I plan to put that into action here soon (as a separate project).

Food can also be received from other people, whether it’s formal government assistance or just eating at mom’s house or a friend’s house once in a while. Other food items like salt, pepper, ketchup, etc can be obtained for free from certain restaurants.

In many cases you can also grow your own food, whether in your apartment window or in a house garden, etc.

Plus sometimes you can just eat less food. Depending on how well-nourished you are, it may be a plain fact that you’re eating too much. Obviously that’s for you to decide and is definitely not applicable in all cases.

Let’s plug in some “realistic” numbers and see how they come out. We’ll assume our budget-conscious friend has an income of 12 million lei per month (after taxes).

Absolutely Mandatory Cost Almost Mandatory Cost
Rent 200 Food 500
Intretinere 100 Heat/Cooling 100
Electricity 35 Internet 45
Water 10 Telephone 75
TOTAL 345 TOTAL 720

.
Since our friend’s “Absolutely Mandatory” total is far less than 50% of his total salary, he’s got a great place to start.

Our grand total then would be 1065 lei. From a starting salary of 1200 lei that leaves us just 135 lei for everything else, which includes clothes, transportation (which might be part of “almost mandatory”), going out, buying presents, drinking a coffee in town, etcetera.

Clearly not much money is going to be saved with this budget.

A lot of times people try to “save money” by hacking away at their “Everything Else” column and ignore the “Almost Mandatory” to their own detriment.

Looking at the numbers above, it’s obvious that the food budget jumps out as being rather large (in comparison to everything else). Even if this person could shave off just 135 lei from their food budget, that would literally double their “extra” money used for everything else.

But it could be something else. Perhaps you and a neighbor who already has a wi-fi network set up could meet and agree to split the internet costs. Or perhaps you can go to a pre-pay situation on your telephone and cut costs that way.

My budget and numbers above are fictional but the underlying concepts are valid whether you’re talking about a small salary in Romania or a huge salary in British pounds.

Let’s review. For the goal of having extra money in your pocket at the end of the month:

  • Actually know what you’re spending – and on what.
  • Calculate what you spend in each of the three categories
  • Look at where you’re spending too much money and think of ways to reduce those costs

Bing! It’s really that simple. There is just no way in the world you’re ever going to get a grip on money unless you spend some time focusing on it. I know that’s an unpleasant “chore” but really it’s a form of paying yourself. Simply spending an hour a month writing down your expenses (using your jar of receipts) is all it requires.

In fact, I bet you that without consciously trying to spend less money at all, just the fact that you’re saving your expenditures to be tallied up later will actually make you more aware and you’ll actually spend less money during the month.

Try it and see!

11 Comments Add yours

  1. Dan the Man says:

    Will try to keep those damn receipts.

    Like

  2. Katharine says:

    This may be the best budget advice I’ve ever gotten from anyone.

    Which is sad.

    Like

  3. tudor says:

    Why would you include Internet and telephony on “almost maandatory” list …?
    Furthermore, why would be sooo expensive? On a budget way much greater, I spent half the price for those.

    Like

  4. Anca says:

    I just added up what I spent on groceries for December (I use Mint.com to keep track of all transactions). I need to stop shopping at Whole Foods… (and/or get a job)

    Like

  5. fLoreign says:

    Ha, and you think this makes you more Romanian than me? Boy you’re wrong!

    Now seriously, here’s a free e-book on living debt-free:
    http://www.walletpop.com/david-bach

    Like

    1. Sam R. says:

      I don’t think I’m more Romanian than you – I know I am! :D

      Like

      1. fLoreign says:

        The litmus test is: “stii juca cruce?”

        Like

  6. Denisa says:

    You really need to set up a Facebook Like button.

    Like

  7. Andrei says:

    A nitpick: it’s actually “cheltuieli”, the plural of “cheltuială”.

    Like

    1. Sam R. says:

      You’re right! :D

      Like

  8. Dan the Man says:

    Oh…such a long time since I didn’t do this…and I should’ve done it!

    Like

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