How Do You Budget?

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Change Your Budget Habits

Google “How do you budget” and you’ll get tons of how-tos on budgeting.

Up until just a few days ago, I, like the 761 million other people that have written about budgeting, assumed that was the right way to think about budgeting – it’s something you do. Then, I opened a recent edition of DailyWorth and Amanda Steinberg hit me with this:

“The truth is, you don’t have to ‘stick to a budget’; it’s already there (money’s coming in, bills are going out, right?).”

All of the sudden, “How do you budget?” becomes “How do you budget?

Let’s go down this new road and see if we can improve our budget system.

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Revealing Your Budget

To begin improving your budget, you have to take a good snapshot. You need to discover your budget. Remember, your budget is a living thing and whether you manage it or not, it’s happening. Don’t start with a blank piece of paper. Don’t list out your income and expenses. Don’t write beside them what you (wish you) made and spent on each item on the list. That is painful, boring and setting yourself up to lie to yourself and wonder why you end up short each month.

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I want you to grab two things:

  1. Your last month’s checking account statement or your check register, and
  2. Your last month’s credit card statements.

With this information I want you to do a very simple exercise:

  1. List your checking account. Then, next to it, (a) list the total of your deposits and (b) list the total of your withdrawals.
  2. Then, list each of your credit card accounts and next to each, list the total of new monthly balances.

The objective is just to get a high-level, monthly overview of all the money you have coming in and going out. Don’t get into the details. We don’t care about the specifics of the income and expenses – just the totals. With this done, it is very easy to calculate (and see) if you are spending more or less money than you have.

Take a look at the example I did below, starting with the top section:

Change Your Budget Habits

Look at item #1: You can see that I simply subtracted my withdrawals from my deposits and it looks like I have $422 left over for the month. However, this is number is deceiving and is the source of a lot of debt trouble.

Let’s move down to item #2: I have added in my credit cards and simply wrote down any new charges I have put on my credit cards (ignoring any existing balance for now). As you can see, that $422 is quickly eaten away and I am actually spending $253 more than I brought in this month.

Changing Your Budget (Habits)

Completing this simple exercise will quickly give you a clear picture of how your budget needs to change. In this case, you need to alter your spending by $253 or make $253 more (this may be is easier and certainly more fun).

In the lower portion of the above worksheet, I have made some adjustments:

Look at item #3: Without getting into the details of each item within these accounts, I tried to devise a logical plan I can follow.

The first adjustment I made was in my checking account. I simply took a little bite out of it and made it a round number. I’m sure I can find $78 in discretionary spending (e.g. eating out is always a surefire area to save in my budget). As an alternative, can you find a way to make an extra $100 a month? You can. Be creative.

Then I looked at the credit card I used the most. Chances are there are a few big purchases there or one too many runs to Target or Wal-Mart. So, I figured I could shave $100 off of that.

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Finally, I went to the last credit card that I only used a little bit. Easy strategy here, which I think makes controlling your budget easier as well – reduce the variables. Take that credit card out of your wallet and only use one. With less temptation, I guarantee you will save money by only using one credit card.

Look at item #4: You can see we have balanced our budget and the only thing I need to remember as I go about my daily business are these three things:

  1. Keep my cash, check and debit expenditures under $4,500 or make any extra $75 to $100;
  2. Take all but one credit card out of my wallet;
  3. Keep my credit card spending under $400 for the month.

Now your first battle is won – you have a balanced budget. The next fight is to squeeze out a little leftover cash each month to start paying down the debt in the right-hand column on my worksheet. But, as they say, one step at a time.

Do the same exercise. Come up with your three rules. What are they? Don’t forget to do it again at the end of the month and see how you did.

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