How to Budget

There are several  websites out there that can give you complex-looking  equations, color coded schemes and in-depth Excel spreadsheets.

My blog is not one of those websites. I hate math—I took Computer Science 101 in college to fulfill my math requirement.

I introduce to you the easy way to make a budget. It happens to be MY way.

Step 1. Calculate your Take-Home Income

You need to work off what you’re actually bringing home, that means after taxes, 401K, health insurance, your flex spending account and anything else that’s deducted from your paycheck.

Step 2.  Set up automatic savings deductions

I promise you, that if you automatically deduct savings from your paycheck each month, you will save more money than if you waited until the end of the month to put whatever is “left over” into a savings account.

Some companies let you split your automatic deposit into two accounts—see if your company allows that, and if so, take advantage of it. If not, set up a savings account, that automatically deducts on the day of or day after you get paid. ING Direct is an excellent online savings account, which offers higher interest than most brick and mortar banks.

Out of sight, out of mind. If you don’t see that money in your checking account, you’ll be less tempted to spend it.

How much you should put away in savings is up to you. If you really think you can’t save ANYTHING, start with $10 a month. And gradually increase. We’re saving big for a variety of reasons but even when we were paying off credit cards, we were still socking away about 10%  into our savings account (and it came in handy when we had to pay off our credit cards a lot sooner than we thought)…

Step 3. Calculate all non-variable bills and expenses.

This is only your monthly MANDATORY expenses, like rent, utilities, student loans. These are the items you pay every month, without fail, and they are usually the same cost every month.

This DOES NOT include money for groceries, dining out, gas, etc, since these are variable amounts that can change month-to-month.

Step 4. Calculate all your irregular bills.

This includes car registration, and car insurance—you know, those pesky items that you get a bill once or twice a year. Once you’ve calculated this total, divide it by 12, and add it to your monthly non-variable expenses that you calculated in Step 3.

Every month, you will contribute this amount into a separate savings account so that when you do get hit with those bills, you won’t be having to eat Ramen for a week to pay for them.

Step 5. Figure out the Leftover

Here is what your budget should look like at this point: Now you have what I call “the leftover.” From this leftover amount, you should calculate how much you spend on food, gas, dining out, clothes, etc. (I also refer to it as the OTHER category.) At the end, you should be at 0. Meaning every penny should be accounted for. When you have money floating around, that’s when money seems to magically disappear from your wallet.

The Leftover is where you can really cut back on expenses. Depending on the month, our food budget varies by $100. Some months we eat more meat, other times we eat more pasta. We really try to stick to these budgets. Gas is another one—now that I have a shorter commute, our gas consumption has gone down.

Entertainment, Dining Out, Clothing, Home Improvement projects, etc are all areas where money can be drastically reduced.

Once you figure out a budget for all these things, you create categories for all of them in your notebook. I usually take two sheets in my budget notebook, and I write on sections of these sheets: Groceries, Dining Out, Clothing, (etc…) and I leave spaces underneath each category.

Then throughout the month, I track EVERY. SINGLE. EXPENSE. And deduct it from the category that it belongs to. I write the date, the amount, and what it was for.

So your grocery budget may look like this:

And so on and so forth.

It can be a pain in the butt, but I usually check our checking account online and add these expenses to the notebook. We also use only one credit card so I can track those expenses too.

Step 6. Cut Back, Pay off Debt and Save

Once you’ve figured out what you have in the Leftover category at the end of every month, this is most likely the amount you’ll be able to squeeze pennies to pay off debt and contribute more to your savings.

Perhaps start by trimming all your leftover budget by 10% across the board. If you have a $100 dining out budget, you’ve just saved $10 and it’s not that much of a difference. You could probably cut that amount from your grocery budget too and not notice a huge difference. Then contribute that money to paying off debt or savings.

There are plenty of ways to save big money by incorporating little changes. Check out how we saved $7,000 by making some small changes!

I hope you enjoyed my guide! And as for how I come up with those cool color-coded pie charts? Honestly, I take each bill and divide it by my total income—that’s how I know what percentage it is. And then I input the info into Excel, using only two columns, and create a pie chart so that I can share with everyone!


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  4. Donna

    So much wisdom in your post…..we live in a country that tells us we have to have… show we can have if we choose to keep on budget.

  5. Jason Cabler (@DrCabler)

    Excellent! A budget is absolutely essential to getting control of your financial situation and succeeding with your finances. If more people people did a written budget every month there wouldn’t be nearly as many people in tough financial situations.

    My wife and I have been doing a written budget for years now and I’ve found it’s the most important tool we have to keep our money under control so we don’t spend more than we make. I just wrote a post recently about what happens if you tried budgeting and it didn’t work for you. Doing a budget is always the right thing to do but you can make mistakes with it if you’re not careful. I address those problems and what you can do about them here:

  6. Paul @ The Frugal Toad

    Max out the Roth 401k if you can. This automatically forces you to live a little more frugally and takes care of your retirement savings at the same time. I use Mint on my iPhone to keep track of my budget, it really helps keep me from overspending when I always know how much I have spent!

  7. Jamie @ This is me...mastering money

    Great post. I’ve never had a budget and I REALLY need to create one that I can stick with. Thanks for making this post user friendly :)

  8. Diego

    Good post, I’ll forward it to my wife! Luckily, I was born with a “built-in” budget mind, and I keep track of everything all the time, but I completely suck at teaching other people how to do it… This guide will be very useful!

  9. Anne Sabine

    My main goal for 2012 is to finally learn how to and actually stick to a budget. This one seems super easy and I will definitely be using it. Thanks.

  10. Dee

    Thank you for the guide.

    It may sound silly, but I always wondered what I should spend my leftovers on. We always spent it on extra stuff (thinking we are staying within our spending limits).

    I guess the leftovers is what allows you to chip away at the debt.

  11. Jessica

    Great information! Budgeting (like dieting) really can be so simple, it is hard not to try and seek out a quick fix. My hubby and I are also newlyweds on a budget trying to reach some goals. Do you track your budget in excel or online? I am still trying to find a great place to track my expenses… any suggestions?

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