1. Analyse Past Spending Behavior
The first step to budgeting is to know how you've spent your money in the past. So sign into your bank account and start categorizing every purchase you've made for each of the last 3 months. Going back 6 months would be better.
Every purchase must be categorized, even if the category is "Miscellaneous".
Try to be as concise as possible. Having a category for "Food" is good. Breaking that down further and having a category for "Groceries" and another for "Eating Out" is better.
Also each monthly bill is its own category. So "Electric Bill", "Water Bill", "Chase Credit Card", "Rent", "Car Insurance" & "Gym Fees" are all their own category.
Know the minimum payment for each credit card that you have as well as the amount that you've actually been paying.
You also need to track income. I only track regular sources of income such as paychecks from a job. If your income regularly varies because of the number of hours you work or because you are paid commission, your budget will have to be based on a very conservative estimates of future income.
All of this can be done with paper or pencil, or on Excel. There is also budgeting software you can use. Some of it is free, most are not. My wife and I just use Excel.
If you've never lived on a budget before, be prepared to be shocked at the amount of money you spend (waste) on things like eating out, going to the club or the movies. This shock tends to drive people to temporarily be too miserly and cut all the fun stuff out of their budget. Don't do this! Unless you are completely in the hole every month, leave at least some fun stuff in your budget.
2. Pay Yourself First...Most of the Time
The common wisdom in budgeting is to pay yourself first. You do this by setting up an automatic payment from your checking account to your savings account every time you get paid. And that's good advice...if you have the money. There was a time when I could not do this. I had no money left after I paid my bills, paid for gas, and food.
Don't beat yourself up too much if you're in this spot. Beat yourself up a little, so that you learn your lesson...just not too much. Plenty of people have been in the same position and eventually got out of it. It takes what seems like an eternity. but eventually you'll get out of it...or you'll die, in which case it doesn't matter anyway.
But if you have enough money to pay your bills, get to and from work, and purchase food, then save part of every check. Most experts will tell you to save 10%. If you're really ballin' they say you should save 20%. But even if you can only save $5, then save that. Do what you can. You may also want to consider getting a second job.
3. Prioritize Your Spending
Decide what to do with your remaining funds. How much are you going to spend eating out? How much do you need for gas, entertainment and cable? Using the info gleaned from step 1, you can make a reasonable estimation of what you will need to allocate for each category.
You will probably find that in certain areas your spending is completely unacceptable. Or you may find that you need first need to prioritize building an emergency fund.
Here's an anecdote for you:
My wife, in an effort to save money, would allocate an unrealistically small amount of funds for groceries. The meals she planned were either too small to fill you up or they were cheap but not the kind of food we actually liked. This unrealistic planning caused us to eat out more than planned. I finally convinced her that by spending more money on groceries, we would spend less eating out and less over all.
Be realistic with your plan.
4. Wherever Realistic, Use Cash
Obviously you aren't going to be paying most of your bills in cash. Things like rent, cable, and your car payment will most likely be paid with a check or via fund transfer. But for things like entertainment, groceries and eating out, use cash. I suggest you use an envelope system like the one here. (<---by using this affiliate link you help support the site.)
With an envelope system, you have an envelope for each category in your budget where you use cash. So as mentioned in the paragraph above, you would have a "grocery" envelope, an "eating out" envelope, and a "spending money" envelope for you and one for your spouse.
When you know how much cash you need, you go to the bank and and make one withdrawl. My wife actually hands the teller a piece of paper that states how many $20's, $10's, $5's and $1's she wants. Then the exact amount budgeted goes into each envelope. Getting all the cash at once prevents all of those pesky ATM fees.
When you run out of money...then you're done spending on that category until your next payday. If you run out of money in the "grocery" envelope, then put back the stakes and get ramen and Hamburger Helper. No money in the "eating out" envelope? Then you're eating at home until payday.
5. Pay Off Your Debt
Credit card debt is particularly bad. Be strategic when paying off your debt. Dave Ramsey tells people to pay the minimum payments on all their credit cards except the one with the smallest balance. You put all available funds toward paying off the smallest one. Once that one is paid off, you take all the funds once going to your smallest credit card and add it to the minimum payment on the card with the next smallest budget. You continue on in this manner until all of your credit cards are paid off.
I think he may espouse this method because he may think that this method provides a psychological boost when you see a small, and thus easier to pay off, balance eliminated. But financial experts seem to disagree with his methods. They say that you should you should put your efforts towards first paying off the card with the highest interest rate. Then move on to the card with the next highest interest rate. Paying off the highest rate card first actually saves you money in the long term.
Whatever you do, don't decrease the amount that you pay on your credit card, even when amount due decreases. If this month you have a minimum payment of $250 and you decide that you can pay $300 per month, next month your minimum payment should be smaller. When it is, you should still pay $300. When that card is paid off, add that $300 to the minimum payment you've been making on the next card. In this way, you will pay your debt off faster.
6. Build Up Your Savings Account
Financial planners say that you need at least 3-6 months of living expenses in savings, but this is a minimum. Eventually you want at least a years worth of living expenses in savings. From their you can start saving money to invest. Buy rental properties, trade options, maybe start moonlighting as a freelance male escort who caters to women 55-70 years of age who are too ugly to get dates. Follow your dreams, but get your finances in order first.
Too many people avoid budgeting because they're lazy or they think that budgeting is synonymous with self denial. Its not. Its about making smart choices now so that you can live the best life you can. Its about maximizing your money. Its about impulse control. In words of Dave Ramsey "Live like no one else, so you can live like no one else."
That's it for this post, catch ya next time, gentlemen.
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