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You’ve probably heard it before, but I’m going to say it again: If you want to take control of your finances, personal budget plans are absolutely vital! I know that creating a personal budget plan sounds like a royal pain in the butt… BUT it really isn’t.
It’s simple, as a matter of fact.
Yes, there’s work involved. You need to track and record your spending for a couple months, compare it to your income, and see where you can make improvements.
After the initial work is done though, you get to see how easy saving money and paying off debt can really be.
The steps involved in developing a budget:
- Track and record spending
- Sort the necessities, nice-to-haves, and extras
- Total each category
- Figure your monthly income
- Compare income to expenses
- Improve the numbers
- Develop a budget plan
Track And Record Your Spending
This may sound very straightforward, and seem like it needs no further explanation. But it does for one very simple reason:
This is the step that destroys most attempts at creating a budget plan!
Because far too often we aren’t honest with ourselves when tracking our spending.
Don’t believe me?
If you were on this step and stopped for gas, then decided to hop into the store for a $0.79 cup of coffee, would you save the receipt and record the $0.79?
Most people wouldn’t, because it’s only $0.79. Big deal!
Well, if you stop for gas twice a week and grab that $0.79 coffee each time, that’s 8 coffees a month for a total of $6.32.
Sure, $0.79 is almost nothing. And $6.32 over the course of a month certainly isn’t a ton of money.
But if you do it, and your spouse does it, now you’re looking at $12.64 a month.
What about when you need to run to the store for just a gallon of milk? It’s only $2-3. No big deal.
Do it three or four times a month and it turns into $6-12.
Add that to your coffee and you just spent almost $25 that isn’t included in your tracking, and can totally throw off your budget plan.
How many other little things do you buy here and there that you don’t even think about? There are plenty of examples of this, and I’m not going to go over them all.
The point is that while you are recording your spending, you need to record ALL of your spending.
Every. Single. Penny.
If you aren’t going to be honest with yourself about your spending, your budget plan will fail before it even begins.
Get a receipt for every purchase you make. Gas. Groceries. Restaurant. Clothing. Everything! Save every receipt until the tracking is finished. You’ll need to go back through them to sort out the necessities, nice-to-haves, and extras.
Speaking of which…
Sort The Necessities, Nice-To-Haves, And Extras
After you track your spending (ALL of your spending) for at least 2-3 months, it’s time to do a little sorting.
And maybe a little soul-searching.
I say a little soul-searching may be required because some of those things that we see as “necessities” are really only nice-to-haves. We don’t need them. We just want them. And it’s critical that we sort them into the proper category.
So let’s take a look at each category.
These are going to be the things that you absolutely need to pay for. Housing. Car. Food. Existing debt.
When I say housing, I specifically mean the mortgage or rent. I’m not talking about those gorgeous curtains that you just have to get. Sure, it’s for your house, but it’s not a housing expense.
Here’s what to include in your necessities category:
- Car payment
- Vehicle insurance
- Average fuel costs for vehicles
- Vehicle registration
- Vehicle maintenance
- Necessary utilities
- Anything that maintains the home
- Existing debts
Any expenses that don’t occur monthly, average out. If your yearly vehicle registration is $360, divide by 12 and budget $30 every month. If you get an oil change every three months and it costs $60, divide by 3 and budget $20 a month. You get the idea, right?
After you’ve listed all of the necessities, total them up.
Then go back and make sure they are really necessities.
Did you include the cable bill under necessary utilities?
Get rid of it!
Although internet has become a necessity in our society, you can live without cable.
You can also find less expensive alternatives for a lot of those things you’re struggling to cut from the necessities list. A lot of the necessities, too.
For some ideas, read this article:
Now that you really have only the necessities in your list, total them up again.
This is the amount that you absolutely have to spend every month.
Make sure you used your minimum payments for all debts, such as mortgage, car payment, student loans, and credit cards. I know this goes against all the financial advice you’ve ever heard, but for our purposes right now add up only the minimum payments. It will make sense when we get into developing the plan later in this article.
These are the things that we don’t absolutely need, but would really, really, really like to keep.
In this category you can put in things like cable/satellite TV, your morning coffee at Starbucks, that gym membership you only use a couple times a month, and those treats from the grocery store that you don’t need but really want (it’s OREO’s for me! I love those things!).
How do you know which part of your grocery spending is necessity and which is the nice-to-have? That’s why I said to save the receipts. Go through each one and circle the necessities like milk, meat, bread, fruits and veggies. Add these up for your necessities category, then cross them off.
Now you can go back through and circle the nice-to-haves and do the same thing.
Be honest with yourself. Just because you bought it at the grocery store doesn’t make beer, chips, or ice cream a necessity.
Go ahead and add up all of your nice-to-haves, and get a total that we can use to develop our plan.
Exactly like it sounds, these are the things we can certainly do without.
But this is the hardest category of all to pick out of your spending because there is so much overlap with the nice-to-haves.
Remember I said in the nice-to-haves section above to save your restaurant receipts? So eating out is a nice-to-have, right?
We all need a treat now and then, or the stress of saving money will make us abandon our budget completely (I know, because I’ve done it!).
So, look at how many restaurant receipts you have.
Are there four?
Add up what you spent, divide by 4, and get an average cost for every time you eat out.
Budget for one of those in your nice-to-have category, and put the other three in extras.
Do the same with your clothing expenses. Yes, occasionally clothing is a necessity. Sometimes putting a little variety in your work wardrobe is a nice-to-have. But did you really need to buy three new pairs of shoes, or six new neck-ties?
Budget for one in your nice-to-haves, and put the rest into extras.
Like I said, this is going to be the hardest part. But it has to be done.
So take your time, and after you think you’ve finished, start over.
See if there’s anything you can take from necessities and move to nice-to-haves. Then see if any more of your nice-to-haves are really extras.
When you’re sure you’ve moved as much as you can as far down in priority as possible, you’re ready to move on.
Total Each Category
I know I said to do this at each step above, but I want to make sure you take a good look at those numbers.
Did any of them surprise you?
I know I was shocked the first time I sat down to develop a personal budget.
For the longest time I thought I was struggling to make ends meet because the things I needed to spend money on were just more than I could handle comfortably.
But after I sat down and took an honest look at where my money was going I realized that I shouldn’t have any problem paying for the necessities. For that matter, I could comfortably afford most of the nice-to-haves.
It was the extras that were killing me!
I discovered that, on average, almost 30% of my monthly expenses was on random stuff that I didn’t need. It was just extra junk that you don’t really think about when you buy it because, “Hey, it’s just a couple bucks!”
Turns out that “just a couple bucks” four or five times a week adds up fast!
Knowing our true spending habits is a powerful tool to get our finances in order and better our financial situation.
By taking the steps of sorting out the necessities, nice-to-haves and extras, we learn what we need to spend each month, what we want to spend each month, and what we probably shouldn’t spend each month.
If you were really honest with yourself, you could probably cut everything in the extras category and put all of that money back in your pocket. Sure, it would be hard, but you could.
I’m not suggesting that you do, though. When we get to developing the plan, this is the first category that we’ll use if we need to make cuts. But we never want to cut all the extras.
Like I said earlier, we need to treat ourselves sometimes or our budget becomes our most hated enemy and we throw it out the window (Been there! Done that! Regretted it later!).
That’s why I started this site. I’ve learned many lessons, and made many mistakes along the way. If I can help just one person learn what I’ve learned without having to make the same mistakes, I will consider this website a success.
And now that the shock of just how much money you’re spending on things you don’t need has faded a little (hopefully), let’s move on.
Figure Your Average Monthly Income
If you are a salaried employee, this step should be easy since your pay doesn’t really fluctuate.
But if you work hourly, incentive, by-the-job, or part-time, this could take a little bit of legwork.
You’re going to want to go back and gather your pay stubs for at least six months. A year would be better.
If your employer does electronic pay, it should be as easy as logging into your account, going back six months to a year, and adding everything up.
If it’s all paper checks and you kept your stubs, again, pretty easy. If you didn’t keep your stubs your employer should be able to print you a summary of all your past payouts for a year.
After you get your total, divide by the number of months you added up to get an average.
This is the number we are going to use to develop your personal budget plan by comparing it to your average monthly expenses.
Compare Income To Expenses
This step is pretty straightforward. Take your average monthly income, and subtract your average monthly expenses from it.
Hopefully it’s not a negative number!
If it is a negative number, it’s not the end of the world. It just means you are going to have to cut some of your extras to get it to at least $0. A positive number would be even better.
Don’t feel bad if you don’t have a big number. The first time I did this it looked something like this:
Yeah. I was spending $210 more than I was making.
And my credit card bills proved it.
So, I cut my extras. ALL of them. And ended up at +$340.
But, like I said earlier, it didn’t work, and I went back in the financial hole.
So I had to try again.
This time, I did things a little smarter.
Improve The Numbers
How do you dig yourself out of a financial hole?
By thinking about where your money is going, and why.
We already know that we can make cuts from the extras category. Just make sure they are cuts you can live with. If you have something in the extras category that happens eight times a month, don’t cut all eight. Cut six. Keep two of them and treat yourself now and then. You’ve still made a drastic improvement.
Take a look at your extras column and see what you can comfortably cut. COMFORTABLY being the key word. I know it’s hard, but it has to be done. Just don’t make it so hard that you hate your life. Keep it comfortable.
Did you make the cuts?
Now, get the new total for the extras category. It’s smaller, right?
Compare your income with your new expenses total.
The number just got bigger. Cool!
Now look at your nice-to-haves category.
Yup, this is going to be even harder. But it still doesn’t have to be miserable.
Remember that cable bill I told you to put in the nice-to-haves category? It really is nice to have, but you don’t need it. Can you do without TV completely? Then get rid of it. Can’t live without TV? Then find a cheaper option. One option is to sign up for Amazon Prime. It’s not just for free 2-day shipping. You also get access to their TV and movie streaming library. If you pay yearly, it’s only $99. That figures out to $8.25 a month, and there’s more TV and movie time on there than you could ever hope to watch. How much could you save if you switched from your cable or satellite to Amazon Prime for only $8.25 a month?
And Amazon Prime isn’t the only option. Check out the Entertainment section of this article:
There are probably a lot of things in this category that have cheaper alternatives. Read all of the article linked above and see what you can find.
Remember the restaurant bill I said to put in this category? Can you reduce that without getting rid of it completely?
Where do you go out to eat? Is it a nice Italian place? Go to a pizza shop instead. Most of them serve some of the same pasta and meat dishes you’ll find at the fancier places, but for far less.
Make any cuts or cheaper substitutions you can, then add up your new total. Now compare you income with your new expenses.
You’ve got even more left at the end of the month!
Guess what. We’re not done yet.
Yeah. Your necessities category.
No, we can’t get rid of these expenses. But we might be able to reduce them.
Do you have a mortgage? Look into refinancing and see if you can get a lower rate and payment.
Credit card debt? Look for a new card with a 0% balance transfer offer. Or check into a consolidation loan with Prosper.
Student loan payments? Refinancing might help reduce your rate and payment. Take a look at Credible and see what they can do for you.
You might even be able to get less expensive home or auto insurance. I suggest you get a quote from Esurance. They are backed by Allstate (who we all know has been around forever), but are set up to have far less overhead, which means big savings.
There are a ton of great options for all of these and more. Just check out the High-Interest Debt section of this article:
After you’ve gone through and found every reduction in rate and payment that you can, total up your new figures in the necessities category.
Add up your expenses again, then subtract from your income.
Your end of the month number is now as big as we can get it, at least for the time being.
Now we have the numbers we need to get started with a plan.
Develop A Budget Plan
You know your average monthly income. This is the money you have available to pay what you need.
Now you also know exactly how much you need to spend, want to spend, and can spend on occasion.
So we have a budget plan, right?
What we have right now is a budget, showing us where our money is going, and how much is left at the end of the month. To turn that budget into a budget plan, we need to plan what we will use that leftover money for.
For more information on how a budget plan helps, read this article:
This is where things get a little tricky, because everyone’s situation is different. I can’t possibly know exactly what your numbers look like to guide you on exactly what you should do.
What I can do is offer you some general guidelines to putting that money to it’s best use.
Set some aside
I don’t care if you have $1,000 leftover at the end of the month, or $100 left over. Set some of it aside.
How much is up to you. But pick a number, and stick to it. EVERY MONTH!
When I finally figured out how to budget properly I set 30% of my leftover aside every month.
And it saved me from falling back in the hole later.
You never know what might happen. Your car might break down. Your kid might get sick. Your furnace may give out. Unexpected expenses can kill the best planned budgets.
But if you religiously set aside 20-30% of your surplus every month, at least some of that unexpected expense can be covered without ruining your planned expenses.
When it happened to me it as my car breaking down. I had about $300 extra at the end of the month, and reliably put $100 of it aside. After six months, when my car broke down, I had $600 available just waiting in a separate account. The repair bill came to $720. I covered most of it out of the money I had set aside.
Choose a debt to pay off first
Remember when I told you to only include the minimum payments for all of your loans and credit cards and you thought I was completely out of my mind?
Well, it’s about to make a lot more sense.
Think about it for a minute. You’ve probably been paying a little over the minimum on all of your debts, right? At least whenever you could. Because every little bit helps.
Then why does it seem like the debts never go away?
Because sometimes the interest adds up faster than what you are paying above the minimum.
The only way to get rid of those debts is to pay them off faster than the interest can build up.
That’s where our surplus money at the end of the month comes in.
After you put aside your 20-30% (or however much you decided on) how much do you have left? $50? $100? Maybe $300?
Whatever it is, put it toward one of those debts and pay it off as quickly as possible.
I can’t tell you with any certainty.
Some people choose to attack the highest interest rate first.
I chose the lowest balance so I could get rid of the debt faster, then add that minimum payment to attacking the next debt.
One thing I can say with certainty is don’t go after the biggest debt first, like a mortgage. Yeah, it would be great to pay it off. But if your mortgage is just $50,000 and you put an extra $200 a month toward it, you’re still looking at years to pay it off while your smaller debts continue to cost you money in interest.
So pick one of the smaller debts, either with the highest interest or the smallest balance, and get rid of it like you hate it (because you do!).
Once you get it paid off, it’s time to re-figure your budget.
Re-figure And Re-plan
When you pay off a debt, you change your budget. So you need to refigure it before you move on to attack your next debt so you know how much you can put toward it.
It’s very simple.
Just take the minimum payment for the debt you just paid off away from the necessities category, and add it to your monthly surplus.
Did you just pay off a debt with a minimum payment of $30? Take your 20-30% of that $30 and set it aside. Now you have about $20-24 more to put toward paying above the minimum on your next debt.
So choose another debt, either highest interest or lowest balance, and put your surplus money toward paying it off fast.
Repeat, repeat, repeat
Continue attacking debts one at a time, and adding more to your payments as each debt gets paid off.
Don’t forget that every time you pay off a debt to add a portion of that money to your set-aside fund. If your car breaks down or your furnace decides it doesn’t want to make heat anymore you’ll be very glad you have that fund.
And a really nice treat for yourself since you put in the work to get this far, you can dip into that fund every once in a while for fun.
Remember all those things we put in the extras category and then got rid of a portion of? Now you can get some of them back. Did you move four restaurant trips to extras, then cut it down to just one? Give one back to yourself every couple of months as a treat. You’ve earned it.
Personal Budget Plans Made Easy
I told you creating a personal budget plan didn’t have to be hard or scary.
You did it, didn’t you?
Just add some numbers, then subtract some numbers, then get rid of some debts. That’s really all there is to it.
The hard work is making sure you stick to the plan. As long as you do you’ll see your debts go down, and your savings go up.
Would you like to pay your debts off even faster? Would you like to boost your savings quicker? Read the following articles for ideas on making money from home:
- Work From Home On The Computer
- Home Based Business Ideas With Low Startup Costs
- Work From Home And Earn Extra Cash
You have the tools you need to set a course toward a better financial future. Now it’s up to you to use them and make it all happen.
It can be hard at times, especially when you are first setting out to be more responsible with your money. So if you ever need help, or a little encouragement, feel free to reach out. Leave a comment below about what you’re struggling with. I’ll try my best to help you get through it.
And let me know about your success when you pay off that first debt! It’s a great feeling to get rid of a burden like that. So share it! Be the inspiration for others to say “Hey! I can do this too!”
Thanks for reading,