My Guide to Being on a Budget

This post was originally published in 2013 but gets updated yearly.

 

The feeling of having debt is overwhelming and when you're trying to work on paying it off as one of your financial goals, it can be chaotic if you don't have the other aspects of your finances in order. A major aspect is creating and living by a budget, not to restrict your spending in an unreasonable way but to assign every dollar of your money a job whether it's to be spent, saved, or put towards debt.

In my 20s I was terrible with money and that stemmed from not having a budget and spending in unnecessary ways using my credit cards. I had used them for many years to cover emergency expenses that weren't truly emergencies, or at least they didn't have to be.
Once I had my own apartment at the age of 22, I was using credit cards for my groceries and going into debt that way.  Every payday I would pay my bills but then never had enough left for the important things like gas for my car, groceries, and emergency expenses that would pop up from time to time. I was convinced it was all because I wasn't making enough money but really it was because I wasn't managing money the right way.  Even I had thought being on a budget meant not being able to spend money.  That's the biggest misconception with a budget.  I needed to get a plan to organize my finances so I could spend my money in a disciplined manner.

That Filofax cash envelope system above is something I made for myself when I got on the right track. I paid off my credit cards and got into better financial shape. Now, it's 2024 and I've been debt free for well over a decade. I barely give a second thought to my finances because I've designed my system to run like a well oil machined.
If you feel overwhelmed and stressed out with debt and how to manage your income, the system I'm going to explain to you can definitely help. It's not only changed my life but I have friends that have told me how great life is since they put these methods into place.  As a heads up - I have budget spreadsheets you can get for free here. They will be very useful as you try this system out for yourself.

1. TRACK YOUR DEBT

To start, make a list of the following things:

• every debt you have and the current amount you owe
  
• the due date for each debt
• the minimum payment for each debt

This should all go into a spreadsheet like in the above photo. Remember it's just an example so yours will look very different. You can get my downloadable Debt Pay Down Tracker for free here. I set up formulas to subtract my payment and show what I owe in the next month. The only thing this spreadsheet doesn't show is interest rates, so just know that your actual amounts owed may differ when you factor in that charge. Your debt minimum payments are considered a fixed expense each month and can only decrease as you pay them off so it's important to get a total for how much you pay towards them as the minimum.

2. MAKE A LIST OF HOW YOU SPEND

This list will help you determine what categories you need in your budget. This is an important step so don't skip it. It's necessary to look at where your money has actually been going over the last year. Pull up a year's worth of bank statements and if you have receipts for things paid for in cash, those are going to be really helpful here too. Take markers in several different colors or write the expense category by each expense.

This list will help you determine what categories you need in your budget. whatever you do, don't skip this step. Even if it's things you shouldn't be spending money on, keep those on this list.  There's a way to allow for those types of expenses but when your budget is in place, you will have a better idea of what you can spend on them at any given time without taking away from more important expenses. Your expenses may include things such as:

• groceries (food, toiletries, cleaning products, beauty products)
  
• dining out
• fun money (movies, tickets to events)
• clothing
• pet supplies and vet costs
• medical expenses (prescriptions and co-pays)
• car expenses (inspection, registration, repairs, oil changes)
• gas 
• miscellaneous (random things that pop up here and there)
  

After you have your list of categories, you need to review your spending for each category and total up the amount you spent in each one. If you're able to identify things you bought but didn't need (fashionable car mats are not a need - an oil change is), don't add those into the total. If you can't identify what you purchased like those impulse buys at the grocery store, it's okay. You can always reduce budget amounts for a category at anytime.  Remember - you will have a budget so YOU can control your money. 

Divide the total by the amount of months you gathered expense for, whether it's 12 or 6. This will give you a ballpark figure of how much money you should be setting aside for each category. Even if you don't need an oil change every month, you want to set some money aside each month so that when that expense does occur during the year, there's money designated for it.

3. MAKE A BUDGET

In order to make a budget you will need to determine your monthly income.  This would be the money you make on a REGULAR set basis - like your paycheck. Make sure it's an amount you can rely on. If your income flexes from month to month, use a smaller guaranteed amount because you want to plan for the worst case scenario.  This amount goes in your budget as your income.
Next you should enter the categories and monthly amounts from step 2 into your budget. Also include the fixed minimum payment amounts for your debts from Step 1. The category for them can be debt, credit card, or whatever you choose. Remember, you can change the amounts at any time so don't get too stuck on that for now.

Put all of these categories into your budget whether it's an excel spreadsheet or a template you're using like my free budget spreadsheet.

You will need to set up a formula so that your monthly fixed expenses and budget category expenses get subtracted from your monthly income and give you a leftover amount. It might be a positive number but it could be a negative number. But the goal is to eventually get it to $0. You want to account for EVERY SINGLE DOLLAR that goes into your bank account, so that you have no room for spending carelessly.

There may be expenses that arise that you don't have money set aside in a specific category for. If it's an emergency, Step 5 will explain why you are covered. If it's a category your forgot about and feel like you'd benefit from including it in your budget, go right ahead. A great example is computer expenses. As a blogger it's a tragedy when my computer crashes and it can be a big expense to get fixed so I decided to designate $10 a paycheck to a computer fund. I may not use it for an entire year or even several but it sure is nice to have when I eventually need it. This also acts as a mini savings fund instead of just an envelope category which I'll discuss in the next 2 steps.
For expenses that get taken out of your bank automatically, that doesn't mean you will leave $0 in your bank account for them. There are different methods people use to keep money set aside for things. Yours could be to leave ONLY that amount needed for those bills in your account. This also means you will have to be disciplined and not spend it, so it's a good idea to look into your options for creating different shares in your bank account. I have one set up called "bills" and I transfer bill money to it when I don't want it in my checking account until when I know the payment is coming out soon.

4. USE BUDGET ENVELOPES FOR SPENDING CASH- NO DEBIT CARDS

You can find an upclose look at this envelope system here.

I decided to create my own envelope system that was pretty and unique because it makes it more fun for me to manage my money using a Filofax system, which you can see here.

I made labels for each category that I deposit cash into on payday. No more spending with my debit card because it was a bad habit for me. Cash makes you more apprehensive to give it away which means you will think twice before handing it over and going through with an unnecessary purchase.

On payday, you can get cash from the bank and divy it up into each envelope. Not every budget category needs an envelope, and like I mentioned earlier you can use shares in your bank account to set money aside for specific things.  You may want to have a pocket for receipts and a ledger for when you spend money from each category.
If you have money left over in the envelopes at the end of the month you can keep it in there to act like a mini savings fund for that category or you can move it to another category. Do what works best for you and your lifestyle.
If you're short in one category, be careful taking from another.  Sometimes it's very necessary but don't make it a habit or else you won't stick to your limits.  The idea with this type of spending system is that if you know you don't have the money for it, you shouldn't get it, especially if it's not a necessity.

5. Build an Emergency Savings Fund

An ESF (Emergency Savings Fund) is the fund that you can tap into for emergencies such as car repairs, medical emergencies, speeding tickets, or emergency home repairs. If an expense pops up and you are short in your envelope for that category, you can pay the rest from your emergency fund.

There are 2 golden rules to know about the ESF:
1. You always want to have AT LEAST $500-$1,000 in your ESF.
2. You ALWAYS replenish it after you take from it and you ONLY take from it when it's an EMERGENCY. A new handbag, fancy TV, or night out on the town is NOT an emergency.

If you live paycheck to paycheck, you may feel like there's no way you can come up with even $500 for an emergency fund. You have to think of it this way: if a life or death emergency came up for yourself, a child, or a pet - and you had to come up with a certain amount of money ASAP, wouldn't you do anything possible to come up with that money? The fancy handbags you own won't mean a thing to you suddenly and you'd probably go through and sell some for cash.  That's the spirit you need for the emergency fund. Sign up for survey sites (I mean legit online survey sites that I posted about here, limit your other spending on things that you really don't need like pedicures and dining out. 

I went through my closet and sold clothes, I thought twice about every piece of furniture I owned and ended up selling a couple things via Yard Sale groups, and I sold large items such as Kitchen appliances on Craigslist. All the money I made went directly into my ESF. Build up your ESF first BEFORE you start paying down debts!

Once you have your emergency fund, you won't have to worry about using your credit cards for emergencies so just pay the minimum payments on them until your ESF is fully funded. If you try to do too many things at once, you'll give up and then everything you've done goes out the window.

6. BUILD YOUR MINI SAVINGS FUNDS USING ENVELOPES

The mini savings funds are a great thing because you can make one up for a certain amount of time like if you're saving for a vacation and then go back to your normal budget amounts.  This is why I said you can adjust your budget at any time. I weighed the benefits of a pet emergency fund vs. pet insurance and it's more sensible for me to put money aside each paycheck in my vet fund.

7. STOP SPENDING!

I know how hard it is to stop spending money when it's become such a bad habit and consumerism is the way of the world anymore but trust me, it's worth it.  It won't be like this forever.  This is just the path you're on now to get your finances in overall.

Get comfortable with giving up luxuries. When I had to cut back my spending drastically I began doing things like buying a $5 kit from the store to do pedicures on myself.  I look for discounts and coupon codes before I buy something.  I started eating less (which was a good thing because who needs to eat a bag of chips in one sitting in the evenings) and that cut back my grocery bill.  Healthy lifestyle habits go hand in hand with healthy spending behavior.  Eat what you have on hand before buying something duplicative at the grocery store. Go through your utility bills one by one to see if you can cut back in any way. Instead of a night out with friends, have them over and ask everyone to bring a dish.  Attend free local events to save money but still get out and have fun.

8. STOP USING CREDIT CARDS AND DEBIT CARDS

I put all of my credit cards in my safe right away. No need to have them because if my ESF is full than I can always use that instead of credit. I cancelled and cut up a few of my cards over the first couple years (cancelled 1 every 6 months).
Only use your debit card for things that you are good with budgeting.  If you know you can stay within your budget amount for groceries, then go ahead but if you're just starting out, it can be too tempting and throw you off your game. Figure out what works for you and the options you have in your own bank account with making shares and paying things in cash vs. card.

9. PAY DOWN YOUR DEBTS

Do all of the things from step 6 to get more money to put towards your debts.  You have to make sacrifices.  Of course I still enjoyed life while I was actively paying off my debt. I absolutely went out for dinner or bought clothes I needed, but I did it with limitations and stuck to a budget.  And when you have a card paid off, roll the minimum payment amount from that card into your next debt so you're paying more than the original minimum.  Apply any extra money you can into your debts. The sooner each one is paid off, the better you will feel, I promise. 

10. SAVE

After you pay off your debts, and sometimes while you're paying them off towards the end, make sure you put money aside in a savings. You can have it in the same savings fund as your ESF, or a different one. I have $40 a month that goes into my ESF so even when I hit the $500 mark, money still kept going in there. You can read about how I became debt free here. 

Here was my timeline:
August 2012 - Started budgeting
December 2012- Paid my car off
January 2013- Used what I paid in car payments to build up ESF ASAP
February 2013 - Paid store credit card off
March 2013- Paid another store credit card off and continued card after card until....
April 2015 - Became Debt Free!
May 2015 - Bought a house with my boyfriend (now my husband)
I hope this post was helpful for you.  There are plenty of finance posts on my blog like this one so please check them all out under the Finance category. 
And make sure you sign up for your free spreadsheets here, purchase my book, Fixing Your Finances, and join my Facebook Group!

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