When we decided to pull ourselves up by the bootstraps and get out of this debt, living within our means for the first time was a little rough. It would have been easy to give up if we hadn’t already hit proverbial rock bottom. We were fired up and motivated from Dave Ramsey’s excellent lectures, and set about making our first budget.
Making a budget is pretty simple, in theory. The point of it is to tell your money what it will be doing for you. Give every dollar a job. The nitty gritty of it is to predict what your income will be for the coming month. Then you list all the expenses that you’ll need to incur that month. Using a spreadsheet, a calculator, or good old fashioned paper and pencil, you make sure that expenses will be less than income, and put the remainder onto your goal of choice. If it comes up negative, you play around with the numbers until it comes out equal on both sides.
Simple! But not so easy, especially at first. If you’re anything like we were, you have twenty random charges automatically being added to your charge card or deducted from your bank account on a monthly basis. They’ve been there so long you don’t even know what all they are. When you do finally get your budget to balance out, one of these suckers will show up and mess up your pretty little lines. Then there are the unpredictable income factors like when you get a second job, or take on overtime, to get out of debt- how much will you be receiving? How do you allocate income when you’re not sure what it will be? What if you think it’s coming and you don’t get it?
And the biggest curveball of all when you’re moving from credit card buffers to a cash-only system: Cash flow issues. That is, to me, the most complicated part of the puzzle. If you make this much in a month, but you don’t get paid until the 30th, how will you buy food the second half of the month? There are a couple ways to do this and I’ll try to outline the basics of each.
The most comfortable way to do this is to get a month ahead with all your expenses. This is the method taught by the awesome budget program (and my five star recommendation) called YNAB (read my brief review of it here, complete with affiliate link). YNAB was introduced to me by my dear second cousin, Audrey during a way-too-long-ago visit. When you’re already in debt and struggling to live within your means, it isn’t the easiest thing to get to that place, but if you can find stuff to sell, get a second job, collect money from everyone who owes you, or something, and stick all that money in your bank account, you’ll be cooking with grease. This method gives you a little leeway in that you base *this* month’s expenses on *last* month’s income. There’s no guesswork involved, and the “grease” part comes in when you accidentally overspend in a category (we all do it! part of life) and it’s not the end of the world. Instead of going into overdraft, it’s just deducted out of what you have available to spend next month. This is a really simple way to solve all those cash flow issues, if you can get to that point of having an extra month’s expenses in the bank at all times. The reason this method is the most comfortable and safe is that you have a whole month of lead time should you incur a huge, unexpected expense – plenty of warning to hit the pavement and start making some serious cash to get square.
Dave and I were just way too impatient for that method. If we had any extra money in the bank we wanted to put it straight onto our debt, not an account called “buffer.” But our method is slightly more risky (less lead time in emergencies) and possibly more labor intensive (closer monitoring of the bank account and pending transactions). First, I waited until we had some extra money coming in (a third paycheck or tax refund or something) and made sure that we budgeted two months of housing in one month. Since rent or mortgage is generally the largest single payment in almost anyone’s budget, if you can get ahead on that, you’re seriously improving your cash flow. Now, even if we’re getting our first paycheck of the month as late the 13th, it doesn’t matter because the rent check is always coming out of the second paycheck of the previous month, not the first of this one. After that, the only thing we really needed to worry about were a couple of credit card bills that happened to be due at the beginning of the month, and 2 weeks’ worth of gas and groceries (in case we were getting paid as late as the 13th). This is the buffer we keep in the account from month to month. Our buffer is $1000 and it’s been more than enough to keep us cash flowing through all the bumps in the road.
Don’t forget, you also have to budget for things you know are coming down the road, like renewing your car’s license plate, buying propane, paying for a quarterly service like trash, or other bulk/ seldom transactions. It’s best to save up a portion of the amount each month so that it’s not an undue strain the month it shows up. Since there is always something we’re saving up for, that adds a little bit more of a “buffer” in the checking account, too – it is not truly “available” money, but it is there in case you run into those lulls in cash influx during one portion of a month. This is why it’s just not a good plan to use a bank balance as your indication of what you can spend – which is precisely what I used to do. Instead, you are basing your spending on *income* minus expected outlays, whether or not they are happening right now.
Some tips for making your first budget:
– Figure out a way to make some extra cash if it’s at all possible. It will really be necessary the first few months, because you need to build up a buffer quickly, as well as have a little cushion against all the things you forgot about when you drafted your first budget. Have a garage sale. Sell stuff on ebay. Babysit. Mow lawns. Get a pizza delivery job. Sell those US bonds that are sitting in your drawer. Cash out any non-retirement investment accounts. Something to get an extra bit of cash to help start you out.
– Every month is a new and different month. You can’t use a boiler plate budget. You have to consider upcoming expenses from the month you’re budgeting. Sit down toward the end of the month and think about all the possible expenses you might be incurring that you didn’t have last month. Birthdays, weddings, car maintenance. This way you keep your budget lean and mean and actually working for you.
– Do NOT underbudget on food or utilities, etc. This is probably the single biggest mistake. When you finally write down what you spend or plan to spend, and look at the number for the first time in one lump sum, it can be pretty scary and make you go, “Well, hey, let’s lower this a bit; I’m sure we can make it on less… let’s just eat beans and rice in the dark four nights a week.” I’m pretty sure this is the fastest way to discourage first time budgeters. By all means, try to come in under (or even WAY under) the budgeted number for groceries and other necessities. Then at the END of the month, you can re-allocate that money for something else, be it next month’s groceries or your buffer or your debt snowball. But to go from a history of spending $1500 on groceries and eating out, and then plan to eat for a month on $600 instead, is just a bust waiting to happen.
– Go easy on yourself. No matter what mistakes you may make in this first few months of getting on track, you are doing WAY better than you did before, because you’re actually trying. You’re planning. You’re giving your money a job. Last month, you worked for your money. This month your money is working for you. At least, some of it. And next month, even more will. It’s a start, and you have to start somewhere.
– Give yourself some visible reminders of why you’re living like this. Living within boundaries, when you haven’t before, is difficult. Dave and I were really excited about getting out of debt, and that made it easier, but it still took a lot of re-programming and remembering why we were so motivated. We posted our credit card bills on the fridge and would mark in bright red marker whenever we paid a balance down. Other ideas are, to keep a cut-up credit card in your wallet as a reminder of what you hope to achieve. Or put up a picture of a nice vacation spot that you plan to visit, 100% paid for in cash, after your goals have been met. Whatever it is that will motivate you, try to keep a token around to help yourself stick to the hard realities of not being able to buy anything you want the moment you want it.
– Don’t forget the mad money. It’s completely unreasonable to expect yourself to go on this road without a steam valve of some kind. Unreasonable budgets are ignored budgets. Better to allocate some amount of money to personal, discretionary spending and do whatever you want with it. Impulse purchase a tape measure shaped like Sponge Bob at the checkout, or save up four months’ worth and buy a lamp you really want. However you choose to spend it, is up to you, but you really do need that bit of freedom. How much you allocate is dependent on your situation. When we first started out it was only $5 or $10 for each of us a month. For the last few years it’s been $30 and that’s entirely sufficient for our needs. It may not sound like a lot to someone who is used to dropping $130 on a purse she really wants to wear to this one party, but it’s plenty when you realize that everything you truly NEED is already safely accounted for in the budget, and this is simply for splurging. And anyway, I saw a purse really similar to that at the thrift store for $4.
Did I miss anything? What have you found to be the hardest part of budgeting? What’s your favorite part?
Socks on the Line 
When you say cash-only, do you mean cash, or using your bank card? I find the biggest challenge is using the bank card, because it is so convenient. On the other hand, it lets you track your spending exactly. I don’t know how many times I have looked back in the bank account and wondered what that withdrawal for $40 was for. Recently I opened a n0-fee bank account for the sole purpose of writing cheques (side question: do you call it “checks”? and a “checking” account? I have seen it spelled that way and wondered whether our “chequing” account was yet another spelling difference between Canadians and Americans) so I could write a cheque, deposit the money and forget about it. Unfortunately, I wasn’t aware of the 5 day hold on any money deposited in the machine before it can be accessed. I just figured this out after the cheque I wrote to my brother-in-law and his new wife bounced even though the money was there.
My other biggest struggle is not being on the same page as my husband who has yet to really harness his desire to stick to a budget and save for something. We aren’t in any debt but we are in this vicious cycle of “feast” during the week after payday and then “famine” on the second week. I think the mad money idea may work for him. Great tips, thanks!
I mean “cash” as in “not credit.” That includes physical cash, checking account (yes, it’s the American spelling), and debit/check cards.
I use my check card almost exclusively. (When I run it “as a credit” I even get rewards as though it’s a credit card, but the money comes out of my account!) But, it works for me because I am the kind of person who loves to log into the bank account and reconcile the budget as often as possible. So if you aren’t, it may work better for you to use a cash envelope system or something like that.
If you often pull out cash to use for something you need to figure out what works for you to do your record-keeping. Some ideas: Use a billet holder for your cash and replace any cash with receipt; Keep a note pad in your car or purse and record the amounts and what they are for; use an empty check register to record the dates, items and amounts for your cash transactions.
Generally when I take out cash, I consider it “off budget” and I record the category then and there in the budget program. I.e. if I take out $100 for groceries, I record it when the cash comes out. Then I don’t itemize it again when I spend it. If I don’t spend it all I can either use the rest for groceries another time, or re-deposit the remainder in the bank. Same goes for our “mad money” – Dave likes his in cash, and takes it out to keep in his wallet at the beginning of each month. I like to keep mine in the bank and spend it on amazon.com on the check card. 🙂
Not being on the same page is a real tough one. I only know what Dave Ramsey says about it, which is, if it’s important to you and you clearly tell your spouse this, and they repeatedly don’t listen, it’s more of a marriage issue than a money issue. There may be other feelings and baggage involved that need to be talked through in a series of conversations, so both people can figure out where the other is coming from and come to a workable solution. Some of the solutions might be reassurances, and others budget items.
Have you checked out Phil Lenahan? I got the tip that he’s a Catholic Dave Ramsey and I do like his approach of starting with the spiritual aspects and using that to motivate you to get your finances in order. Maybe that would appeal to your husband more?
Yes, we have Phil Lenahan’s books but have never really sat down with them and read them. They are packed ATM but I suppose we should read them when they are unpacked. I suppose it’s not so much of a disagreement about what to save/spend, more like a incompatibility about how to go about it.
🙂
I’m starting to feel like I’m the guy arguing for spend-thriftiness, but I really have some questions about some of these long-standing austerity budgets. Really? $30 a month for all splurging in the entire household? Is there a line on the budget for “grabbing lunch at McDonalds because we were out too long on shopping day”? I give myself $32 per week and my wife gets $28. (It’s keyed to our age, so it’s gone up slowly over the years.) We have a separate splurge account for “family” as well. That comes to $320- 400 per month.
But before you start frothing at the mouth, keep in mind that those allowances cover EVERYTHING: eating out, clothes, books, movies, music, Christmas shopping, birthdays, new furniture; the works. If it isn’t a regular, unavoidable expense, it comes out of somebody’s allowance. So somebody has to personally take responsibility for every little hit to the budget. It also means I don’t have to consult with my wife before I buy a candy bar or a cup of coffee.
Absolutely – the reason we can keep ours low is because our budget is set up to have more specific control over everything. We have a separate budget item for gifts, clothes, eating out, furniture and everything. Even the “avoidable” expenses are budgeted. And it does mean I can’t “grab lunch out because of xyz” – at least not more often than my blow money will allow- so I am more likely to plan ahead and bring sandwiches, etc. Is it more work? Sure. But when we’re out of debt we can start upping the play money. Until then it’s just there as a small steam valve.
I find when the budget is expanded, the spending expands to fill it. So keeping it as lean as possible gives me assurance that as many dollars as possible are headed straight toward my goal with as little waste as possible.
This is a great post! You wrote about everything important I could think of. We also got ahead a month on mortgage, save up every month for annual items (e.g., 1/12 of our HOA dues), and have a buffer. It helps so much. I love your series on this topic.
I have set up my budget similarly. Mine is fullproof for me. I have my bills all divided up by my paychecks (2 per month). I pay everything by the month. I may pay a little more for the variable bills so that it is always covered and regular. I pay those ahead about a 1/2 a month ahead from my billpay account. I have a separate account for the bills so that I can track bills and spending separately. The rest gets divided up for the 2 weeks in the month. I take off the top expenses like clothes, new dishwasher, etc. The rest is food and such. We know what we need for food and gas so it sort of regulates itself. This works for me because I am bad a checking on the balance and keeping in the “budget”. I can keep up with what is left in the account to spend. What I love now is that I can not overspend with my debit card. Now it is really foolproof even if sometimes embarrassing. (I sometimes ride very close to the bottom of the barrel and I am not good at adding up what is in the grocery cart. I have to put things back on occasion. In those times I am glad that I didn’t overspend.) Very encouraging! Thanks, Sarah!