It’s Frugal Friday! If we were to list the things we LOVE the most, it would be God, each other, our kids, family, friends, BUDGETING, and Disney. I am so thrilled to share these Step-by-Step Budgeting Basics! Just four short years ago, we were so clueless about budgeting and literally floated from month-to-month with no understanding of where our money was going and why (WHY?!) we had no money left. We had car payments, student loan payments, home loan, and we even took out a loan to buy some furniture. Let me share with you how our lives have changed and how we’ve taken control of our finances.
Step-by-Step Budgeting Basics
1. Sign up for a Financial Peace University class near you.
These classes are offered everywhere (usually at churches) and many new classes are starting this fall. You do not have to be a member of the church to attend. In fact, we weren’t members (or even in the same denomination) of the church where our first class was held. The cost for materials is about $100. Please do this. The class is the first step to knowing how to budget and why to budget. You will be empowered, encouraged, enraged at your former self. Since attending our first class four years ago, Ryan and I have led two Financial Peace University classes at our church. We are self-proclaimed Dave Ramsey experts and (I am not kidding) we are listening to the Dave Ramsey show on our car radio right now as I type this!
If my word isn’t enough to convince you, we had 4 families in our most recent class. The AVERAGE debt payoff in 9 weeks of the class was $2,500 per family! Most people didn’t even start paying off debt until week 3. After four years of following this program, we are debt free, aside from our home. I was able to leave my job to become a full-time mom in February 2012. Our current goal is paying off our house, which we plan to complete in a few years. We have been able to visit Disney World 3 times! Our 4th Disney trip is this fall. We’ve been able to pay off each trip before we go using our budget. This is real!
2. Make a list of your monthly expenses.
Start by reserving at least 10% of your income for Tithes (if you are a member of a church). Then add basic necessities such home, utilities, food, and clothing. Move up from there to vehicle gas and any other monthly debt payments such as car payments, student loan payments, etc… The easiest way to to do this is to go through your bank statement from last month and see how much you spent in each category. If you have debt, try to cut/remove any “special extra” expenses so you can pay extra on the debt and eliminate it from your life. Once your debts are paid, then you can do the special extras like tanning, gaming memberships, cable, and lots of eating out. This is also a great time to think about how much you may be spending on cigarettes & alcohol. These items can quickly devour your budget, especially since they can be habit forming.
Hygiene/Basic Household Items
Insurance (car, home)
Personal Property Taxes
Other Debt Payments (car, student loan, etc…)
Non-Necessity Items (important, but could be eliminated or cut to pay off debt):
School Lunches (make & send a lunch box instead)
Kid’s Birthday Parties & Gifts
Gifts for Others (baby showers, weddings, birthdays)
Kid’s Sporting Activities
___________ (fill in your own blank)
When figuring expenses, don’t forget to plan for things that sneak up on you or are easy to forget. For expenses that occur once per year, simply take the total amount and divide by 12 (this gives you a monthly total). For expenses that occur every 6 months, simply take the total amount and divide by 6 (this gives you a monthly total). Put that amount in your budget each month. Here’s a list of “gotcha” things we budget for each month so we have a fund built up by the time we need it:
Infrequent “Gotcha” Expenses:
Vehicle Inspection and License Renewal
Home Owner’s Association (HOA dues)
Car Maintenance/Oil Changes
____________ (fill in your own blank)
3. Write your budget in Microsoft Excel.
I suggest using a plain Excel Spreadsheet to write your budget. Divide the month into your pay periods. If you get paid on the 15th and last day of the month, create 2 columns (one for pay period 1, and one for pay period 2).
Add your monthly expenses. Put the expense in the pay period it needs to be paid in. For example, if your utilities are due the 5th of the month, put this expense in the 1st pay period. For some expenses that occur all throughout the month (such as groceries, dining out, and vehicle gas), figure out the monthly minimum you want to spend on that expense and divide that amount in half. Write half the amount in the Pay Period 1 column and the other half the amount in the Pay Period 2 column. This lets you set aside a portion of every paycheck for groceries and you won’t run out of grocery money before the month is over.
Here’s the model we use for our home budget & Fixed Monthly Expenses (amounts that don’t change). Note that since our house payment is a large expense, we choose to budget half the amount in Pay Period 1 & the other half in Pay Period 2. If you do this, you need to start your very first budget month with at least 1 full house payment already in the bank. Otherwise you’ll pay it late! Click for larger image.
Here’s a sample list of Optional Monthly Expenses. Adjust based on your personal goals & needs/wants. Click for larger image.
4.Balance your budget to Zero (0).
When you write your budget, you also want to include your income for each pay period so you know how much you can spend. After you enter all your expenses for Pay Period 1, make sure the expenses = your income. Do the same for Pay Period 2. This is a Zero (0) Based Budget. If your expenses are more than your income, you will need to cut/remove some expenses. If your expenses are less than your income, you will need to decide where that extra income is going–give it a home. I would suggest applying any extra income to outstanding debts– pay extra to get them out of your life faster.
5. Find an EASY way to track your expenses throughout the month.
Now that you have your budget, you need to keep track of what you’re spending throughout the month to see if you’re staying on budget! Financial Peace University recommends using a cash envelope system for certain expenses, such as groceries and dining out. This ensures you won’t go over budget in those areas since you stop spending when the cash runs out!
For some expenses (and folks who prefer to not carry cash) you’ll need to track your expenses. Grandma uses her checkbook to balance these things. You can write everything down in a simple spreadsheet to make sure you don’t go over budget in each category, or you can use an online tool such as BudgetSimple.com. This is a super easy online expense tracking program.
If you want to get really fancy, you can use Quickbooks or Mint to track your expenses and link those programs to your checking account. I’d suggest starting much more simple though. You can try out these fancy (and complicated) programs later.
6. Enter your expenses daily or at least 3-4 times per week.
Now that you know how you are going to track your expenses throughout the month (to make sure you are staying under budget), you need to commit to entering your expenses daily or at least 3-4 times per week. To do this, simply review your online bank statement and enter each expense into BudgetSimple.com or your expense tracking spreadsheet (or however you decide to track expenses. Your bank statement doesn’t separate your expenses into budget categories like groceries, utilities, gas, etc… This is why you need manually enter each expense into your tracking tool–you can see how much you have left to spend on groceries until the next Pay Period comes.
7. Follow up on how the month ended.
After the month is over, sit down with your spouse and go over your total expenses. Did you stay on budget, over budget, or under? If you were over budget, readjust your expense totals for the next month. Maybe you need to budget more forgroceries than you thought. Maybe you need to use more self control at the store:-)
IIf you’re under budget, apply any extra money to your debts, starting with the lowest amount of debt (Called the Debt Snowball in Financial Peace University).
8. Plan a time to create a new budget each month, before the month begins.
You will want to do a new budget each month because some months are longer/shorter than others. If you pay an expense weekly (such as childcare) the amount may change if you have a 5 week month. You don’t want to get surprised with an extra weekly bill you didn’t budget for. There are also holidays and special events happening some months that you may have forgotten to plan for.
If you schedule a time to do this, it’s more likely to happen. Involve your spouse in adjusting the budget! If you wait until after the month begins, you’ll feel overwhelmed and behind.
9. Set some goals!
Budgeting can be challenging at first, but after about 3 months, you’ll get in the swing of it. You’ll discover that your budget requires less changes each month after you discover a pattern and get used to keeping your expenses within set limits. You’ll also likely discover extra money (that was previously unnamed and spent on a whim) that you can apply to debts and savings goals!
Want to pay off your car loans? Maybe pay off your house? Maybe you’ve been wanting to plan a large vacation. Maybe you need to start saving more for your retirement or your children’s college. Maybe you want to become a full-time parent and live off one income. There are so many great things you can accomplish when you have a budget.
10. Enjoy the fun!
Budgeting is fun when you get used to it and see some success from sticking to it and having extra money to pay off debts and accomplish your financial goals. You are teaching your children and family how to exhibit self-control when faced with unnecessary purchases and modeling some great planning strategies. You can do it!
I hope this leaves you feeling encouraged to jump into a budget. Keep it simple. Make it something you understand and will use. Different methods work for different people, but the end result is most certainly awesome:-)
*Part of Financially Savvy Saturdays on brokeGIRLrich and Nearly Retired*