If the word “budget” is like nails on a chalkboard for you, you’ve got a friend in me. I know that feeling.
For many years I wouldn’t have anything to do with a budget because I couldn’t stand the idea of anyone, or anything, telling me how to spend my money. And where did that get me? Into one big financial mess. Every month, when I ran out of money, I would turn to MasterCard and Visa for a bailout. Bad idea.
What I learned from going through that experience and finding my way back to solvency is that, as much as we may loathe it, a budget is the ticket to financial happiness, not the straitjacket I feared it would be. I still don’t like the word, so if it’s OK with you, let’s drop it and call it a spending plan. So much better.
A good spending plan gives every dollar a specific job to do. Once you have it just the way you want it, the plan becomes a handy road map for keeping your finances on track.
So, take a deep breath, and let’s walk through the basics.
Step 1: Write down your total take-home monthly income
This is the easy part! Jot down what you earn. Because many expenses are billed monthly, figuring out how much you have to spend each month is easiest for your plan.
Step 2: Write down your essential expenses.
Start with fixed bills like rent, mortgage, car payment, credit card payments and insurance. These are your essential fixed expenses.
Step 3: List your essential variable expenses.
You know you’ll have other bills, but the amounts vary. Examples are your phone, utilities, food, household expenses, gasoline, medication, public transportation, shoes and clothing. Assign a stipulated amount to each based on past experience, rounding to the closest $10.
Step 4: List reasonable amounts for nonessential expenses.
This includes entertainment, eating out, hobbies and other ways you spend money on a regular basis.
Step 5: Find the extras.
Go to your current method of tracking your spending (your checkbook register, bank statements, credit card statements) to see what expenses you’ve left out. For items that do not recur monthly, determine the annual cost, and then divide by 12 to see how much you should set aside each month to anticipate that irregular expense.
Step 6: Figure out your totals.
Add up your expenses, and then subtract that amount from your income. Don’t panic -- this is just the start of an ongoing process.
Step 7: See where you can cut.
If you came up short, go back to your projected monthly expenses and see what you can eliminate. Look first to your nonessential expenses. Keep making adjustments until your total expenses are less than your income.
Step 8: Follow your spending plan as closely as possible.
Every time you spend money—any money, and in any way—write down two things: how much you spent and what it was for. Use this information to create the next month’s spending plan.
Congratulations! You’ve just gone from clueless to on your way to being financially savvy. You should feel very good about this.