building a budget

Budget is a word that brings fear to some and joy to others: fear to those who don't understand it, and joy to those who do.

When Russ and I got married, we had to figure out how to manage money. At first, we just tried to save as much as we could and spend money as little as possible. I think a lot of people think of a budget in this way: restrictive.

But having a budget is actually incredibly liberating. Budgeting gives you the opportunity to choose how you spend your money, and as a result, it takes away the guilt that sometimes comes from spending money. Now that I have a budget, I don't think I could ever go back.

Here's how to create a budget of your own.

Step 1: Figure out how much money you make per month.

This is pretty self-explanatory. Look at pay stubs, or calculate how many hours you generally work and how much you get paid. For instance, I work 10-13 hours each week, and I make $9/hour. Since my work time is somewhat flexible, I go on the low end to be safe. 10 hours X 9 dollars X 4 weeks = ~360/month. My husband has a salaried job, so we just checked his pay stubs.

Step 2: Calculate your fixed expenses.

Fixed expenses include things you pay for every month, such as mortgage/rent, utilities, phone bills, car payments, credit card payments, tithing, etc. Since these payments never change, and they must be paid each month, they have to be taken out first.

Step 3: Track and set your somewhat-fixed expenses.

Somewhat-fixed expenses is my non-fancy word for things you have to pay for each month, but whose costs aren't always exactly the same. This includes things like gas and groceries. Though these things can change from month to month, you probably spend about the same amount each month. In order to figure that out, you need to track your spending. You can use Mint to do this, and then you can continue to use Mint throughout your budgeting process, because it's awesome. Russ and I still use Mint.

Step 4: Consider your semi-annual expenses.

For some things, you don't have to pay every month. Things like oil changes, haircuts, and insurance come every few months, but you still have to plan for them. Even Christmas, which is only (obviously) once a year, counts as a semi-annual expense because you have to plan across several months for it. The way we generally do it is to divide the amount due across however many months are between payments. So if we have a $250 car payment that is due every six months, we will set aside $42 ($250/six months) each month so that when that $250 bill comes due, we aren't frantic to find that money. If we want to have $300 for Christmas shopping, we have to save $25 each month.

*For us personally, we have found it very helpful to have a separate account for these kind of expenses. We have a scheduled transfer of funds from our checking account into our semi-annual expense account every month, and then when those expenses come due, we just transfer the correct amount back into our checking account to pay those bills.

Step 5: Analyze what you've done so far.

If you make $2,000/month, and your fixed, somewhat-fixed, and semi-annual expenses total $2,100/month, there is a problem. You will never get out of debt and you will continue to get deeper into debt with each passing month. In order to change that nasty cycle, you'll have to change your budgets. 

Since fixed expenses can't be changed, the first place to cut back is on your somewhat-fixed expenses. Instead of spending $200 on groceries each month, can you get by on spending $150? That may mean cutting coupons or only buying food that is on sale in the ads, but it could be a necessary cut of spending. Or could you walk to campus each day instead of driving to cut back on gas costs? Find ways to cut down on spending. In the case of semi-annual expenses, can you go longer between payments? For something like car insurance or oil changes, that's not a good idea, but maybe instead of 8 weeks between haircuts, you could go 12. Your hair won't look as great, but it's one option to cut back.

If you still spend more than you make, you have to examine your fixed costs. You might need to go with a cheaper phone or cheaper plan. You may need to give up Netflix and cable. You may need to move to a smaller place to save on rent. These all sound like undesirable options, but necessary options if you want to be financially secure.

Step 6: Choose your flexible expenses.

If, however, you make $2,500/month and your fixed and somewhat-fixed expenses total $2,100/month, you now have $400 left over to choose how you spend it. This section includes things like eating out, shopping, and activities. Another great way to use this money is to save up for something bigger. But keep in mind, you don't have to save all your money. You can say you'll save $250/month toward a dream trip to Italy, but that you have $50/month for eating out, $50/month for shopping, and $50/month for activities. (Though if you have debt, you should be paying that off before saving for anything.)

This is my favorite part about budgeting: Russ and I get to choose where our money goes. If we decide we want to take a dream vacation to Italy, and we budget so that after a year or two, we have $5,000 in a savings account, then when we take that trip, we can use that money however we want. If we want to spend $200 on a gondola ride (no clue if that's what they cost or not), we can, because we have this money that was specifically set aside for Italy. There's no need to feel guilty, because that money isn't supposed to go anywhere besides our Italian adventure. That's a hypothetical situation, but we've had plenty of real situations that are similar.

For instance, before setting budgets, I felt guilty about spending money on eating out. It was an unnecessary expense and we could probably spend way less if we just cooked at home. But here's the thing: I love eating out. I love fast food, I love sit-down restaurants, I love not cooking. So when Russ and I were setting our budgets, we gave ourself a pretty big budget for eating out. We make enough money that we can choose to spend that amount on eating out each month.

Setting budgets has also allowed us to pay off educational loans, create a confidence account (an account with enough money in it to live off for at least three months with no income), tackle unexpected car expenses, pay in full for Invisalign braces, and begin saving for a downpayment on a home.

Tips and Such

• I will say, budgeting is a lot more fun when you're making enough money that you can save up for things; budgeting doesn't bring as much joy when your money has to go toward paying off debts and when there isn't enough money to eat out as often as you'd like. But I still recommend setting a budget, because budgeting brings peace to your life. And then, when you do get a better job and make more money, you have the skills to put that money to good use, instead of seeing it fly out the door. 

• A recent change that Russ and I have made is to have cash budgets for a few things. Our groceries, eating out, date night, and miscellaneous expense budgets get withdrawn from the bank at the beginning of the month, and then we use that money for the remainder of the month. Sometimes we end up using some of our groceries money to eat out again, or some of our date night money to pay for ice cream instead of an activity (all food eaten out is supposed to go come from the eating out budget), but we usually don't use cards for these expenses because it got really easy to spend more than our budgets. By doing cash budgets, our budgets become tangible and more real. This has been really helpful for staying within our budgets.

• As I alluded before, Russ and I have various accounts for different savings. We have accounts for checking, confidence savings/emergency fund, semi-annual expenses, Christmas savings, big purchase savings (currently that account is saving for a house), and vacation savings. I've found that this just makes it easy to keep things separated. When we were just leaving money in our checking account, it was a lot easier to spend that money instead of remembering that it was actually for some future expense. Most of our savings accounts also get better interest rates.

• Above all, you should learn to make money into a tool that you can control, not something that controls you.

Well I think that's it for this very long and wordy post. Feel free to ask any questions because I love talking about money and budgeting! :)

What are your budgeting tips? Or what do you do to manage your money?