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How to set REALISTIC budget targets

*** This topic was requested by one of our devoted readers. Thank you for the reaching out! **


First of all, if you're unsure of where to even start when it comes to building a budget, check out one of our previous articles "how to build a bulletproof budget" for all the info you'll need to get you started.


Setting realistic targets within your budget is the key to sticking to it consistently. But how do we figure out what the targets should be for each category or expense? Plugging in a random number may be unachievable and cause us to abandon the process altogether, so it's definitely something we want to figure out how to do with accuracy.


The majority of major expenses can be summed up into these 5 categories:

  • Housing

  • Transportation

  • Utilities

  • Food & dining

  • Entertainment

There are a few more categories that belong in a budget, however in this article we'll focus on these 5. We'll dive into these areas to give practical examples of how to figure out realistic targets for each.


1. Housing

Housing is usually the largest expense each month for most people. It also falls into the "essential" spend category as we all need a place to live, whether it's owning your own home or renting. It's also very difficult to just lower your housing expense. You can't just up and move every month if you find somewhere cheaper to live.


So in order for a housing "target" spend to be realistic you will have to total these 4 things, and this will effectively be your target spend each month for housing:

  1. Mortgage repayment (the biggest portion of your monthly payments)

  2. Property insurance (shop around each year to ensure you have the best price for your needs)

  3. Property taxes & rates (usually applied quarterly or yearly, but you still have to budget for them)

  4. Property upkeep (minor repairs & maintenance)

Ideally your housing spend should not exceed 30% of your take home household income, otherwise you're entering into a "debt stress" zone and may struggle to make ends meet each month.


SAVING TIP: If you're really keen on lowering your housing expenses from what they currently are, consider moving to a cheaper state/province, downsizing to a smaller home, refinancing to a lower mortgage rate, taking on a roommate, or even moving back in with your parents. There's no shame in any of these options and they may help you substantially lower your housing costs.


2. Transportation

This includes any cars you own, Uber rides, taxis, public transport, etc. Basically any mode of transport that you use to get around. Transport would also fall under the "essential" category.


Most folks own their own car, or more often than not, they have a loan for a car. If you do have a loan, check to see if there is any early exit fees and if there's not you should make it a priority to pay it off to save yourself in interest.


If you own your own car outright (i.e. without a loan), congratulations! You're one of the minority that doesn't carry an auto-loan. Without a loan to repay, you only really need to budget for insurance, services and fuel. If your car is super old you may need to factor in some repair costs to keep it running.


Targets for transportation can be set like this:


Car payment - Your scheduled repayment amount each month (I'd recommend adding extra to knock it down quicker if you can). This can be found on your bank statement if you're unsure of the amount.


Fuel - Divide how many kilometers you usually drive in a month by how far your car can travel before needing to refuel. This will tell you how many times you'll need to fuel up your car. Multiply this number by the size of your fuel tank (found in owners manual) and price per liter and your answer will be how much you should budget each month for fuel.


Example: Drive 1000 km's / 400km before refill = 2.5 refills needed. 2.5 x 60l tank x $1.30 per liter =$195 needed for fuel.


Service & Repairs - This will vary depending on the age of your vehicle, but usually you'd get a service every 6 months, so you could call ahead to your dealer and ask what the standard service price is for your make & model so that you can budget for this cost.


Auto Insurance - The cost of car insurance will vary based on how long you've been driving, what you drive, and if you've had any accidents in the recent past. It's likely you've been with the same provider for many years and often they offer loyalty discounts, but it's important to shop around to find the best price and cover for your needs.


Don't drive very far other than to work or to the shops? Chances are you can find a provider that will insure you for the amount of distance you travel. This can work out a lot cheaper each month. Whatever provider you go with, be sure you look at the price you'll be paying each month which can be found on the letter of insurance they send you, and this will be your target spend each month.


SAVING TIP: If you're looking to lower your spend on transport you can try carpooling with a friend or colleague to work, buying a bike to get around instead of a car, or even walking if the distance isn't too far. If your car is super-flashy you could even consider selling it for a lower cost used car, although not many people like the idea of doing this.


3. Utilities

Utilities include things like electricity, gas bills, phone & internet, etc. Property taxes can fall into this category too, so be sure not to double count.


Electricity is likely the most expensive portion of utilities and it can be hard to figure out how much to budget each month as seasonality and when you use the majority of your power can greatly affect your bill.


What you can do is grab at least the last 3 monthly power bills (or request them from your provider if you don't have them) and check to see what your average use and spend is each month. This will be your target number. You'll have to watch and adjust your budget each month if your charges start to increase or decrease.


Do the same with your phone and internet as you do for your power bill. Check for any overages and be cautious of the amount of data and call time your provider allows each month. There should be a "normal" price each month once you account for any extra charges. The normal price will be your target.


SAVING TIP: If you find your spend on utilities is a bit too high, aim to reduce the biggest culprit, electricity use. Run larger appliances like your washing machine or dishwasher at night during off peak hours. You are charged less per kWh during these times than during the day. For phone & internet, shop around for a good deal and aim to use Wi-Fi wherever possible so you don't go over your data limit.


4. Food & Dining

This category includes what you spend on groceries and eating out. Unlike the other categories though, this expense can be pretty variable, meaning it can change from month to month depending on your social calendar.


It's a known fact that buying food to cook at home is vastly cheaper than eating out everyday. Does that mean you should never eat out? Of course not. You just have to plan how many times you wish to eat out each month to avoid just grabbing food on the go all the time.


Trawl back through your bank statements (or better yet, get an app that logs your expenses automatically) and figure out how much you usually spend eating out and on groceries. The average per month on each will be your baseline.


From there, make a meal plan for each week of the month and go shopping. Aim to stick to your meal plan as much as possible to ensure the food you've purchased goes to good use and doesn't go off.


As for dining out, you may have found you were eating out multiple times per week without even realizing. Aim to limit this to 2 -3 times per month. Once you've chosen where you'll likely head out to, try to estimate how much it will cost you each time and use the total as your target spend for the month.


SAVING TIP: Compare price per unit ($/100 grams, $/liter, etc.) and name brands vs generic brands when shopping at the supermarket. Don't always go for the product with the best looking label. Before heading out to eat, consider having a small snack at home beforehand and only order the appetizer when out. Avoiding alcohol and sticking to water is another great money saving option when eating out.


5. Entertainment

Everyone likes to head to the movies or binge on Netflix every now and then, and this category should definitely be included in your budget. In this category are things like subscription services (iTunes, Spotify, Hulu, Netflix, etc.), going to the theatre/cinema, ordering a UFC fight to watch, etc. This is most definitely a variable expense category.


First, add up all the subscriptions you pay for each month. Surprised by how many you have? Cancel the ones you don't really use. Secondly, figure out if you like going to watch a movie or see performances, order pay-per-view events, or whatever, and estimate how often you like to do these things. Is it a lot? Well, your target for this area of spend will be quite high.


SAVING TIP: Cancel any unused subscriptions, no matter how small the cost per month. You may be able to save a few dollars on the subscriptions you do use by switching to an annual subscription instead on a monthly one. For the other areas of entertainment, try to plan ahead like I mentioned in the food & dining section. Look for events that are free to attend, or host a movie/games night at yours or a friends house to save a few dollars.


SUMMARY


Setting realistic budget targets can be an iterative experience and will take time to master as you learn more about your spending habits. Today we've covered 5 large expense categories that are applicable to most people. Understanding how to budget and set realistic targets for housing, transportation, utilities, food & dining, and entertainment should cover off 60-70% of your total expenses. Nailing these big items can leave you with a lot more cash to pay off any high interest (above 5%) debt, save and invest, increasing your net worth each and every month.



Blake - FIRE with a family

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Disclaimer

The information and links in this website are for general information only and does not take into consideration your personal financial situation. Everything in this website is not intended as financial or investment advice and should not be construed or relied on as such. Please seek the services of professional advisers to address your individual needs.

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