A question that came up on the post on carrying your food and entertainment budget in cash is, how do you determine your food and entertainment budget in the first place? I’m no financial expert, but I can take you through the steps that worked for us:
(Of course, we have an overall budget that encompasses all of our expenses, but food and entertainment is worth talking about by itself because it is a place where a lot of people lose track of their money.)
1. Set Your Goals.
Food and entertainment are a lot of things–fun, educational, delicious, exciting, life enhancing–but they don’t tend to be lasting. After you eat food, you don’t have anything to show for it except the memory of the experience. And while that has its good points, spending too much on food and entertainment can become excessive and wasteful. I would like to have things to show for our money besides memories of meals, things like, you know, a retirement account and a paid mortgage.
So the first thing to do is to look at what you are getting in exchange for keeping the food/entertainment budget. That means, looking at the big picture. In our case, we wanted to a. increase our savings account and b. pay off all our debt. Those are our goals, what we would get for tightening down on how much we spend.
2. Define What Food and Entertainment Is.
Next, think about what you mean by food and entertainment. For us, it meant either food we eat or amusement that has no lasting value beyond the experience of doing it. So obviously movie tickets, grocery bills, and restaurants fall into that category, but what about buying toilet paper? We buy it at the grocery store but we don’t eat it, so we don’t include it in the budget. What about sporting goods? We use them for entertainment, but they are things that we use again and again (lasting value), so it’s not in the budget. You get the idea.
3. Track Your Spending.
Now that you know what expenses the budget would encompass, the next step is to get a sense of what you are actually spending on food and entertainment. This means recording every single purchase you make in the food and entertainment category for at least a month. You can either write every purchase down or you can use a tracking program on your computer or online. I have found Mint.Com to be a useful tool for tracking spending. Some people also track their spending on their cell phones. Be militant and honest with yourself about this. This isn’t about feeling bad, it’s about gathering accurate information so you can do better in the future.
4. Set the Budget.
At the end of the month, add up how much you are spending on food and entertainment. Warning: this number may upset you. You may be shocked at how high it is or feel out of control or ashamed. This is normal. Try to ignore the feelings and carry on.
So once you know how much you are spending, it is time to cut that number down to how much you actually should be spending. For us, this had a lot to do with Step 1, our goals. So for example, say that after tracking our spending, we discovered that we were spending $1,000 a month on food and entertainment. That’s $12,000 a year just for eating and having fun. We would then look at that number and decide to spend only $6,000 a year on food and entertainment so that the other $6,000 could go into savings. Therefore, we would divide that $6,000 by 12 months and end up with $500 a month. We then divide that $500 by 4 weeks and end up with $125 a week allowed for food and entertainment.
That is the budget.
How do you know if $125 a week is the right number? Well, you really don’t until you try it for a few months. You have to look at your family size, how much everyone eats, how much you cook at home vs. eat out, and a host of other factors based on your situation. It’s about finding a balance between both what you really need (essential groceries) and how much fun you allow yourself (what keeps you from feeling deprived) vs. larger goals like saving money, getting a college education, having a retirement account, paying all the bills, etc. It’s a soft science, so you have to try it out for awhile and see if you are being too hard or too easy on yourself.
5. Stick To Your Budget.
This is the difficult part. There’s going to be an adjustment period where you feel deprived or a little sad that you can’t go out as much. However, resist temptation and it will flee from you. After awhile, you will get used to the new amount and start to like the benefits of having a budget. Focus on what you are gaining, not what you are losing. Not only are you gaining your goal in Step 1, you are gaining control over your money and, by extension, peace of mind. And one thing I know for sure about finances: those who control their money are on the path to financial freedom.
So that’s how I do it. Oprah has a good how-to on creating an overall budget if you want more information. And please leave any tips/thoughts you have in the comments.