Things You'll Need:
- Lined loose leaf paper or a spreadsheet or something like Quicken
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Step 1
We bought a house before we got married, spent time and money fixing it up, borrowed money from our parents to pay a contractor to fix up our kitchen, spent every dime of our wedding gifts to repay our parents, and took a fairly expensive honeymoon that we put on our credit card. Wouldn't change a thing if I could do it over, but we were broke when we came home. Our first supermarket trip was paid for from a box of change that I had been accumulating since I was a kid. On the way out of the market, I decided that we were going to get back in the black. Here's what we did.
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Step 2
Do you use Quicken software? If so, great -- it includes budgeting features that are helpful and print pretty reports. Or, if you have spreadsheet software (like Excel on your computer, or the Google Docs spreadsheet you can use online at google.com), that's also a great tool. But, if you only have sheets of lined loose leaf paper, that's fine, too -- no worries.
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Step 3
This is the annoying part. I need you to track your income and expenses from now until the end of the next complete calendar month. For example, if today is November 15, I need you to track this stuff until December 31. [Sure, you could wait until December 1 to start, but you shouldn't -- we can do lots of stuff now, even before we have all of the final numbers.] What should you track? Everything -- round up to the nearest $1. Nothing silly -- if you spend a quarter a day for the parking meter, just put down a monthly total estimate. But, document everything. The more data you capture, the better your budget will be.
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Step 4
If you're using Quicken, set up budget categories for all expenses. Resist the temptation to create a "miscellaneous" bucket -- that's where the money you want to use for the movies or dining out could hide. In Excel (spreadsheet) or on paper, set up a line for each expense. If you do it every day, say, coffee at Startbucks, just keep adding to the amounts listed on the Starbucks Line.
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Step 5
As you're tracking expenses, examine the big ones -- you can do some research and maybe even lower expenses while we're gathering the info needed to develop the budget. It's tempting to look at small, frivolous expenses first and think about cutting them out. If you're getting a $5 Starbucks coffee four times per month and you cut it to two, you have saved 50%; but only $10; and, you're now having less fun. Remember the title of this story was to find money for *more* fun.
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Step 6
So, let's say that you pay $200/month for TV. If we can trim that by only 10%, you've saved $20 month ($240 per year) -- and not changed your "fun factor". What can be done? Do you really need premium channels? Can you get a triple play package and combine TV, phone and Internet access to save money? Spend a lot of time here -- this is a great place to find money. It's so easy to just pay the TV bills month after month -- that's what they count on. Make a call, save some money.
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Step 7
OK, let's set up the budget. If you haven't collected a full calendar month's worth of data yet, you'll have to revisit the steps below after you do -- but that's no big deal, and won't cost you any time.
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Step 8
We need to make sure that all expenses are recorded. Your monthly snapshot picked up the mortgage payment and utility bills. Now, we need to find the expenses that don't come up every month (school taxes, annual membership dues, quarterly payments, etc.). Go through the last 12 months of credit card statements and your bank check register. Add the extra items to your Quicken/Excel/paper income and expense sheets.
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Step 9
Now, set up the income and expense tracker: a description and twelve monthly columns. Enter all of the amounts that you recorded earlier -- put them in the correct month. For monthly expenses, go back and figure out the monthly payments as best you can without going too crazy. [If you've tracked your gas bill in June, though, you're going to need to dig out your winter bills so that you can figure out your true monthly cost. Again, the better job you do with accurately tracking expenses, the better your budget will be.]
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Step 10
It's going to be a bit less boring soon -- trust me. The trick to this whole process -- finding money for fun -- is to live within your means on a monthly basis. The problem is that not all expenses are incurred monthly. Up to now, you have been using your bank account to figure out how much money you have, right? It's a trap!
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Step 11
In July, you breathe sigh of relief -- you notice that your bank account has $3,000 in it. Finally -- you have managed to get ahead. Then you realize: the $1,200 school tax bill is due in August on the same day as your $1,800 mortgage payment. You are now flat broke. We can't have that!
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Step 12
In order to pay a $1,200 bill in August, what do you need to do? You need to save $100 a month for 12 months. Duh, that's obvious. Well, I missed that the first time -- and it was embarrassing for a 24 year-old to have to visit "Momco Savings and Loan" for a bailout (this was in the mid eighties, so I didn't know it as a bailout then).
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Step 13
So, here's what to do. Now that your income and expense tracker is all filled out, add column 13: annual total. Add up each line item. Budget time! Copy of all of the line items and make 12 columns, but don't bring over the amounts you filled in. Divide the annual amounts (column 13 on your income and expense tracker) by 12 and fill out the budget for the next calendar month.
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Step 14
Don't forget to add line items for big expenses you know are coming up (new washer, computer, etc.). Same deal -- figure out the total cost over the next 12 months and turn it into a monthly number.
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Step 15
The difference between your income and expenses is what you have to play with -- literally! If income is higher, we're almost done -- you just need to go through each line item and see what you can do to improve the picture. Some tips at the end. If you're spending more than you're making on a monthly basis, then the only way to make that work is to carry balances on your credit card. You must get the number into the black before you look for fun money. Some tips for that at the end, too.
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Step 16
This next step seems like I'm telling you to undo what I just had you do. Not really. The purpose of the above was to find your "fun" money. Now that we have (hopefully) done that, the next step is just the usual boring monthly budget. As long as you spent all of this time gathering the info, you might as well use it and make sure your cash flow is OK!
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Step 17
Once you have made as many changes to reduce expenses as you can, it's time to fill out the monthly numbers for the next 12 months. Let's use real numbers this time that reflect the actual monthly costs -- because, again, the trick is to know your real monthly picture. The previous "smoothed" budget told us whether or not you can pay your bills annually -- now we need to make sure you can pay them monthly. Some months, you'll be in the black -- and in August, when your school taxes are due, you'll be in the red. That's fine -- as long as you doublecheck to make sure you're not so far in the red on any given month that you don't have enough cash flow.
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Step 18
So, that's the final piece -- we are going to look at your bank balance. The amount of money you have at the beginning of the calendar month must be enough to pay your expenses that month. To make sure you can handle the next red month, take your current balance, add the black months total "net" to your bank balance, and make sure that you can cover the next red month without bouncing a check. If you can't, a one month credit card or home equity line of credit loan may be necessary. Don't forget to add the interest as an expense for the next month -- and pay off that loan ASAP!
