1. To get started, you will need-- paper, calculator, a pencil, calendar, pay stubs/income, bill statements/expense amounts, a box of envelopes, and a big dose of patience!
2. On a sheet of paper, add up the total of your monthly net income (after taxes). Be sure to include all sources of income.
3. Next, make a column for Fixed Expenses. Under this column list all current main monthly expenses that have a fixed payment, term, and/or are considered non-negotiable for the most part. Next, write down the amount of each bill, next to each category. Total it up at the bottom.
- Utilities- electric/gas, water, trash service
- House- mortgage, homeowners association fee, line of credit
- Insurances- auto, life, renter's, homeowners or real estate (usually in your escrow), disability
- Phones- landline, cell
- Credit cards
- Charity- church tithe, sponsorships
- Other Loans- school tuition, student loans, car, unsecured
- Child Care/Support
- Allowance for kids
- Gift fund- birthdays, holidays, special events
- Pets-vet, food, medicine, grooming
- Clothing- children, adults, dry cleaning services
- Home- repairs, yard services, furnishing/decor, annual insurance
- Auto- repairs, inspections, oil changes, annual taxes, annual registration fee
- Medical- doctor/dentist/eye/specialty copays, medicines, emergencies
- Entertainment- dining out, vacations, activities
- Sports- fees, equipment
- Membership fees- gym, food warehouses
- Personal grooming- haircuts, nails, waxing
- Car gas
- Subscriptions- magazines, movies, online games, newspaper
6. Now go through both the Fixed Expenses and Negotiable Expenses and mark the areas that you could make adjustments to. Note that I didn't say areas you want to make adjustments to. This is where you may need to sacrifice some things you enjoy. Here are some common areas that can typically be adjusted in one way or another:
- Utilities- (Trash Service) call around to different companies and find a lower priced service.
- Insurances- Call other companies and get comparisons on your various policies. You may be able to save hundreds per year!
- Cable- Change your plan, get rid of unused box tops in other rooms, or drop it all together for awhile.
- Internet- Are your items bundled, saving you even more money? Most companies will give you a discount for "bundling" your Internet, TV, and/or phone into one bill.
- Phones- Have a cell phone? Then drop your landline, if you can. Look at changing your cell plan as well.
- Charity- You may have budgeted to give alot a few years ago when you had it, and now need to re-evaluate that amount, now that you are in the red.
- Groceries- Need to set a fixed amount, and stick to it each week. That means putting some snacks back on the shelf. Plan your meals each week, and stick to your shopping list. I highly recommend utilizing coupons, to save even more. See my Tips for Newbie Couponers.
- Allowance for kids- Make cuts until you can get back on track. They need to understand what is at stake here.
- Gift fund- Set amounts to be given for all the upcoming events for the next year. When shopping, stick to the amount that you budgeted for. Be sure to include family and/or friends for: Birthdays, Valentine's Day, Mother's Day, Father's Day, Anniversaries, Parties, Weddings, Baby Showers, Christmas...
- Pets- Can you do any of the grooming yourself? Change the food to a cheaper brand?
- Clothing- Take advantage of sales racks, second hand stores, and hand-me-downs. Try to buy when the season is over, to get the best deal.
- Home- What home services can you eliminate? What projects can be held off for awhile longer?
- Entertainment- Look for free activities. I am always posting freebies on the website, under Frugal Living. Take advantage of those times to do something fun with your family. Make eating out a special treat, verses a weekly habit.
- Sports- Are there any sports that can be placed on hold for the next year, until you get your finances on track? It's all about sacrifice right now...even for the kids.
- Membership fees- I guarantee whatever you are paying for, could probably be done right at home.
- Personal grooming- Cut out the luxuries or learn to do it yourself.
- Car gas- Plan out your week, so you can run errands efficiently, saving gas. Map out your errands for the day, and reduce back-tracking.
- Subscriptions- Don't need it right now. Bye-bye!
8. Once you have your category totals set, indicate which main bills will be paid through your checking account, and which items will become your Envelope System (see step 9). The key is to use cash for most all purchases, except those that need a check written out. It is much harder to spend when you have to fork over cold hard cash, verses a plastic card.
9. Create several envelopes, titling each with a set category. Typically your Negotiable Expenses will become your new Envelope System. I do have a few of my Fixed Expenses, such as car taxes or other bills due annually, in the Envelope System. When the bill comes, I simply deposit the money and write a check to mail that bill in. This helps me gage what I have, and not show too much excess in checking, causing confusing. Now, For each category you use envelopes for, take your category allotted amount and divide it by how ever many weeks are left before the next bill/event is due (annual bills) or 52 weeks if there is not a set due date. (My husband actually receives 54 paychecks for the year, due to some months having 5 weeks in them. So I actually divide my categories by 54 weeks instead.) This is how much need to save to pay it. Write that weekly amount down on the front of that envelope. Do this for each category. Then, take all of the envelopes and add all of the weekly figures together. This is the amount you will take out of your checking account/paycheck each week, as cash, and place into the allotted envelopes. Everything else in checking will go solely to pay the main bills, via check or online payments. You should not use your checking card for purchases that you allotted an envelope for. For example: When you think you want to dine out for dinner, you look in your Entertainment envelope and make the decision, based on how much you have in there. Remember, YOU set these amounts, based on your budget, and YOU need to be the one sticking to them. It is very easy to want to pull from another envelope, but it will catch up with you in time. Don't do it! I recommend you set up a Rollover Envelope as well. This would be used for such things, where as for example: your electric bill came in lower than budgeted one month (like Spring and Fall time), you roll the difference into this envelope. Then, on the months where the electric bill comes in higher than budgeted (Summer and Winter), you pull from this to pay the difference...and so forth. You can use this method for all categories.
10. Now, find ways to bring in extra temporary money, to help build your savings account. Dave Ramsey suggests having a minimum of $1,000 in there at all times, so when an emergency arises, you don't have to fret. Consider having a yard sale, selling used clothes to a second hand store, listing larger unused items on eBay or Craigslist, pawning unused jewelry (the price of Gold is up right now!). I listed a bunch more ways you can cut corners and save money, through everyday living here. Once your saving account is established, use extra money to apply toward debt. As debt gets paid off, you then take the amount you were paying on that old bill and apply it toward the next bill. There are so many things to consider when getting out of debt, that I recommend you read Dave Ramsey's book, "Total Money Makeover". This will give you a complete understanding of how you can use your new budget to actually get out of debt quicker!
*The above article is based on my own personal experience. I recommend you review all your contracts, policies, and terms of your bills, prior to making any changes. Some companies will charge you a penalty to drop or change your service. Don't be caught off guard!
Questions? Feel free to pick my brain by emailing me at email@example.com