A few months ago, I got into some credit card debt and had to go on a budget to get out of it. My mom helped me set up the same budget she used back when I was a kid and our family was living paycheck-to-paycheck.
(I still remember that grey binder she seemed to take everywhere with her. One day while we were waiting for my sister's gymnastics class to let out, she let me decorate it; I used paint pens to draw a border and write "MOMMY'S BUDGET" on the front.)
Since it seems like a lot of my friends have been talking about watching their money lately, I thought I'd share how it works.
Step One. Figure out your monthly expenses: food, housing, gas, debt payments, whatever. Easy enough.
Step Two. Take it further; figure out your yearly expenses. Any significant expense that you know is going to come due at least once a year goes on the list. (This is to avoid that "Hey, I'm doing OK - whoops, my car insurance bill just came and now I'm broke" surprise.)
Also, it's a good idea to budget a bit of money for unpleasant surprises like medical expenses and car repairs. You know they're coming, so why not be ready?
Finally, you need to plan for miscellaneous expenses. The miscellaneous category is not optional. It's not just the "hitting the ATM for Starbucks money" category - it's the "I'm out of paper towels" category, the "birthday card for a friend" category, the "oh, crud, I spent too much on gas this month" category. Trust me; you need a miscellaneous category.
Here are the categories I have on my budget:
- Food (both groceries and dining out)
- Car payment
- Savings (each month a friendly robot takes a small amount out of my checking account and deposits it into a mutual fund or something)
- Debt payment
- Car insurance
- Car license
- Car repairs/expenses
- Medical expenses
- OSU alumni association
- OSU football tickets
As you can see, it gets pretty detailed.
Step Three. In this step, you divide up each paycheck you get into categories for your expenses. For example, if your rent is $500 a month and you get paid every two weeks, you know you'll need to devote (at least) $250 per paycheck to your rent. If your car insurance costs you $600 every six months, that's $50 per paycheck.
Wherever you can, overestimate. If you have a monthly bill that is $26.95 per month, budget $15 per paycheck. If your electric bill ranges from $25 to $35 per month, budget $20 per paycheck.
This is the step where you have to make the tough decisions; if your per-paycheck expenses break down to more than you're being paid, obviously you'll have to cut something out. I had to cut my food budget in half, make sure I was on the cheapest possible plans for phone and Internet, and give up my weekly trips to Target. You might have to cut out cable or consider getting a roommate. This is the sucky thing about life on a budget.
The good thing? All those little bits of extra money you're budgeting for your various expenses are going to spill over each month and pool into little puddles of extra cash you can dip into in a pinch. For example, after five months on the budget I have $25 extra in my rent category. Perhaps I will use this windfall to treat myself to Indian food!
Step Four. Write everything down. I use a binder with ledger paper, just like my mom did, but perhaps you can find a computer program that will set things up for you, or just use a spreadsheet. I've never tried.
Anyway, in the rows of the ledger you'll put your expense categories (with enough lines between each that you can write down your individual expenses), along with how much money per month and per paycheck goes to each one. You'll want a column to record the previous month's balance, a column for each paycheck, a column for any additional income (expense reimbursements from work; birthday check from Grandma; finally Coinstarring that jar of loose change), one for your expenditures, and one to record the balance at the end of the month. It's a little complicated to explain, so here's a picture:
Step Five. Finer points. Start off by listing your bank account balance in the "balance forward" column of your miscellaneous category. You want the amount of money represented on your budget to be equal to the amount in your account, and it's a good idea to check your totals at the end of each month against your bank account to make sure everything balances out.
Your entire paycheck should be accounted for; anything left over goes into the miscellaneous category. Also, I tend to put any extra income I get into misc. Then, at the end of the month, if you go over budget in any other category, you can move some cash out of misc. and into the deficient category.
Step Six. But wait - sometimes the dates work out in a way where I get three paychecks in a month! What then? This is another good thing about this budget. Since it doesn't ever plan for an "extra" paycheck, you get to do with it whatever you wish. Drop it into savings, blow it all on beer and pizza, use it to pay down your debt a little faster - anything you want. This is one of those happy three-paycheck months, so when I get my third check, I'll have an instant Christmas fund!
So, that's my budget. If you have any questions, drop them into comments. And, if you're one of the, like, six people in the world who's not worried about money, sorry for the long and pointless post.