It was in November 2012 when I first “met” Dave Ramsey.
Usually, I save my annual money crisis for Januarys. Nothing says “AH! WE HAVEN’T BEEN BUDGETING FOR THE LAST 12 MONTHS!!!” quite like a new year.
But for some reason in 2012, I decided to switch it up and start my freak out a little early. I think it was because, back then, I had a lot of free time to read. That was when Ezra would sleep on me for hours and it was glorious. It was also when I regularly used my Nook and I was on this e-book kick. One of the books my library had for download was Dave Ramsey’s “The Total Money Makeover: A Proven Plan for Financial Fitness” ** and I thought, hey why not read this?
Prior to that, I vaguely knew of Dave and his plan but neither I nor Alex was really at a place in our lives where we were ready to be honest with ourselves and buckle down and budget. I think we were under the misconception that a “budget” meant you had made some horrible mistake with your money and you had to suffer endlessly to make up for it.
What I learned from reading The Total Money Makeover was that a budget doesn’t mean you’re bad at managing money. A budget means you’re smart because you’ve decided to take back control over your money instead of letting it control you. And I can 100% admit that for the first 5 years of our marriage money definitely controlled us instead of the other way around.
Anyway, I finished the book in record time (I think two days?) and was super eager to get on board. I listed our debts from smallest to largest and started preaching the gospel of Dave to Alex. It took a little while, but Alex jumped on board with me and in no time we found ourselves debt free, selling our house and building a new one. Kind of a dream, huh? I still pinch myself.
Our story is a little unique in that we didn’t have to roll with the debt snowball for a long time. Why? We were one of those people who had a large reserve of savings just sitting around, but we were afraid to use it to pay off our debt because we thought “What if we need this money????” It was a huge challenge to change that line of thinking – what is the point of having savings if you continue to pay out loads of interest in debt… especially if you could knock most if not all of that debt out of the way, and then use what’s left + your income for something you actually want to spend it on instead of paying for mistakes/purchases of the past. That’s why we were technically able to pay off all consumer and student loan debt in what appeared to be record time. And even though our story isn’t the same as others’ who chip away at their debt over many long months, it’s still our story and it still is a valuable one because we changed our mindset toward money and finally understood the value of a good budget.
Which brings me to my point – how do I budget our money each month? Well, I’m glad you asked.
It really isn’t that involved of a process. Here it is, broken down in a few steps -
Where did the money go last month? If you’re just jumping into budgeting, this will be a little time consuming but once you’ve done it and if you commit to keeping up with it, it will be really easy in the future.
The best way to do this is to find a program to do it for you. I used to download all transactions from our bank’s website into an excel spreadsheet and figure it out that way but it took FOREVER and I didn’t keep up with it because I hated it.
Now, I use YNAB – “You Need a Budget” – and it itemizes everything for me. I just have to categorize transactions, but once I’ve done it a few times, YNAB remembers how I categorize things and does it for me. If you use this program, you’ll need to sync periodically or manually enter transactions in. The reason I like this is there is an app for iPhones and whatever I sync on my laptop automatically updates on my phone and Alex’s phone, too. So now there are no excuses to not know how much money we’ve got and where it’s going.
Your bank’s website may offer a similar service, or there are other programs out there like Mint.com.
The point is – pick something that works for you and you know you’ll keep up with. You can’t budget if you don’t know where you’re spending your money. If you’re just jumping in, I recommend going back 2 or 3 months and downloading your transactions to get a clear picture on where your money goes.
Since you’ve checked out your transaction history, you’ll see the deposits into your account(s) that are income. Make notes of those. If your income varies month to month, go off an average of 3-6 months income. Total up your income and write that number down – this is what you’ve got to work with for the month, so it’s the most important number on your budget.
Try to keep this is as realistic and honest as you possibly can – don’t hold back any income. I’m going to have you create a zero dollar budget so that means every.single.dollar of income is accounted for and told where to go. No monies left behind!!!!
Even the most piddly of expenses, like getting your dog’s nails trimmed. Write it down. Check out your transactions to see what those expenses are. Start with the easy ones that never change month-to-month such as your rent or mortgage, electric bill (if you’re on an even billing program – which I HIGHLY recommend doing if you’ve got the option in your area), etc. and for expenses that fluctuate month-to-month, average based on what you’ve spent in the past or just whip out an estimate.
I use a May Book (pictured above) that’s been customized as a budget tracker to do this. I like this book because I can fit it in my bag and tote it around with me so my budget is always there, taunting I mean reminding me of how I should spend my money. Plus, it’s an adorable book so it makes the task of budgeting not so annoying.
Some of my expense categories include:
You may have other categories like credit card or student loan payments, basket weaving, world travel – whatever is a part of your life and you find yourself spending a lot on gets a category.
Now comes the fun part -
Chances are, once you’ve written down all of your expenses and assigned dollar amounts to them, you will find yourself over-budgeted, meaning your income does not match up to the total of your expenses.
But go ahead and total those expenses up just to see.
In the event you’re over-budgeted, you have two options -
If you don’t think increasing your income is a viable option, then you need to revisit your expenses and see where you’re going nuts. There are four main categories you should protect first because they directly effect your well being. Those are – housing, food (groceries only. You won’t die if you aren’t eating out.), utilities (and cable and internet don’t count as utilities) and clothing (obviously I’m not talking about the latest dress at Shop Bob. This is meant to cover your basic needs. You can’t walk around pantsless, unfortunately.).
For me, my out of control expense categories were always eating out and shopping. It may be totally different on your end. Regardless, whatever that amount is that you’re over budget is what you’ll need to cut out of your budget. So, if you find yourself spending $200 more than what you bring in each month, check out your categories to see where you can cut back.
If you truly are not spending gratuitously and you’re just flat out short each month, you may need to look into money saving options like moving so you can lower your cost of living, couponing to save on grocery costs, budget billing plans through your utility company or asking for a raise at work.
Once you’ve filled all the holes and your budget seems realistic and every dollar is accounted for…. follow through with your plan.
You just spent all this time creating a budget and it would be a terrible waste for it to languish, right?? I recommend printing off your budget and putting it somewhere you’ll see it every day – maybe the fridge? Or inside your closet door? Or, grab one of the May Books I mentioned so you can carry your budget around with you. What’s kind of fun with the May Book for budgeting is there is a section to list what exactly you’re budgeting for. So, if there is some specific goal you have in mind, you can track your progress on that goal each month.
With your budget in mind, your spending will be controlled and you can live your life without worrying whether or not you’ll have money to pay this bill or that bill.
And best of all? Because you’ve done the hard work already, creating a new budget each month will be a piece of cake. I highly recommend not recycling the previous month’s budget, but definitely start out using it as a template. Assess what you’ve got going on in the upcoming month, and then map out how your income will be spent. Our lives aren’t static; in March you may not spend a lot, but in April you may want to start saving for wedding gifts you might need to buy over the summer for all those weddings you know you’ll get invited to. Or, in October you may want to start setting aside money for Christmas shopping in November. See where I’m going with this? Just thinking a few weeks out in advance erases most “emergencies” – be realistic about the patterns of life and plan accordingly.
I try to setup the budget for the upcoming month some time in the last week of the current month. So, around the 26th or 27th I’ll start figuring out March’s budget so that when the 1st of March arrives, I’m ready to go.
And that is my system! Is your system different? Tell me about it!
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