When budget making, you should start simple. A budget is not some complex scientific enterprise. A budget is a tool that will help you save money and help you focus your money towards your goals. I tried to have an all encompassing budget that alloted for every penny that I earned. The problem that arose for me was that if an unexpected expense occurred, it threw my whole budget out of whack. I was also spending large amounts of time thinking about how to best organize my budget, make it easy to read, and other little nitpicking things that really didn’t pertain to the budget itself. After some serious reading and experimenting, I came up with a 3 step process to create a successful budget for getting out of debt. The only rule is that you must spend less than you earn.
The first part is to set rough guidelines as to how much you want to spend in a certain area. My first month I planned on spending $300 for food including work lunches. I thought I could spend this amount and not go hungry but still not eat filets everyday. During this first step, you need to track your expenditures for a month. I recommend a small notebook, sometimes called a cash notebook, that you can carry in your pocket or bag. At the end of everyday I empty out my pockets and tally up my receipts in the notebook.
“Once you’ve set some realistic targets, spend the month sticking within those targets. Keep a categorized list of your spending and regularly update your budget with your totals in each category along with any pay you receive. Your first month is likely to have problems as you realize that it’s hard to get off the routine of spending. That’s OK, just keep making an effort and you’ll eventually get there.”
At the end of the month, total up your expenses for each category that you have created. Compare these numbers to the rough budget you created at the beginning of the month. Did you spend more food than you expected? Less on gas? Was there a one-time large expenditure that might have doubled spending in a category? What ever your answers are, make the adjustments now. Again the only rule is that you must spend less than you earn.
The second step in the budget making process is to fine-tune your budget and prioritize all of your expenses. During the next month, you should update your budget at least once a week. Your goal is to create a budget that you can live with and try to trim all of your unwanted expenses. This is the step where you can really see the areas that you can save money and start climbing out of debt. After my first month, I realized I was spending closer to $450 on food and most of that was from buying lunches at work and dining out. I like to go out to lunch at least once a week at work so I plan for that in my monthly budget and reduced my dinners out to once a weekend. I was able to reasonably budget $350 for food. I just cut $100 from my budget that can go towards debt repayment.
During this step you really need to ask yourself: Do I need this or can I get by on something less? I noticed that I had a cell phone bill of $150 bucks and was only using half the minutes due to free mobile-to-mobile minutes. I reduced my plan, saved $50 a month, and use my land line for calls when I am in my apartment. Could you bundle your insurance together? Most places allow you to do that and get a discount. Can you not go out two weekends a month or do a free activity offered in your community? Once you have figured out your priorities and adjusted your categories accordingly, congratulations you have created a budget (Budget 1). Now, you are ready for step three.
Step three is the harder step for most because you’ve been living for two months now on a good budget. You have kept within your limits and spent only what you earn. You feel good. Congratulate yourself on accomplishing a big feat: you made a budget...for someone who has no debt, not for you. You, my friend, have debt to pay. Here’s what to do.
Take a piece of paper and make three columns. In the first column write down all of your categories from your budget and in the second column write the amount you have allotted for each category. In the third column, reduce all of your amounts by 10% (Budget 2). Do not include the categories that are fixed, such as rent, car payment, and insurance. Now the third column just became your new budget amounts. This is how I found money to start paying off my debt. You are spending less than what you earn, and that excess goes towards your debt pay off. It does not matter if you squeeze out $5 or $200, the point is to reduce your spending so you can get out of debt faster.
Budget 1 Budget 2
Rent $1,000.00 $1,000.00
Car Payment $250.00 $250.00
Insurance $120.00 $120.00
Utilities $90.00 $90.00
Food $350.00 $315.00
Entertainment $100.00 $90.00
Gifts $50.00 $45.00
Clothes $100.00 $90.00
Household $75.00 $67.50
TOTAL $2,135.00 $2,067.50
At the end of every month, review your budget and if you need to adjust your categories do so. Using this method I saved over $100 a month from my budget and was able to apply that to my debt. The crazy thing is that I thought I was going to be living so frugally, but in reality I never missed that 10% I cut out.
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A good article on how to start a budget for recent graduates and those just starting to live on their own. The article uses a 60% Budget method for budget, which means that all of your monthly expenses make up 60% of your pre-tax income. The remaining funds are portioned off into 10% increments for retirement, debt pay off, and savings.
