Creating a budget that works for you.

We all have our reasons for why we’ve accumulated a certain amount of debt.  Maybe you made some bad decisions in college experimenting with credit cards while you didn’t quite have the income to actually pay for them, or perhaps you ran into an emergency that you didn’t have the cash to cover, forcing your credit cards to act as a bandaid on your financial situation.

Before you can even start a budget, you first need to come to terms with the fact that it really doesn’t matter what got you into your current position.  You’re here now, and the fact that you’re trying to change it is a great thing.  You need to let go of guilt and resentments you have, and move forward with a plan.  If your mind is stuck on what got you here, you’re never going to make the steps you need to move forward.

Now, let’s get started.  Many budgets out there look at income / expenses with a short term approach.

To me, it’s important to look at a broader picture to really see where your finances go when changes occur in your overall budget.  Looking at a three year plan can help you to narrow your focus and set reasonable goals for future savings, debt repayment, or whatever your goal may be.

There are several apps out there to help with budget basics.

I prefer a more “micro-managing” approach, which keeps you in tune with not just where your finances are today, but where you see them going.  It can be as simple as creating a spreadsheet that essentially works as a “cash flow” projection for your bank account.

First, identify your monthly (and yearly) expenses and income.

Some basics to think about:
Rent / mortgage payment
Student loans / other personal debts
Credit card payments (start with your minimums here to see your basics)
Utility bills
Groceries
Travel expenses (gas, car insurance, car registration, ect)
Cell phone
Fun money
Savings (sometimes this might be zero when you start out, and that’s ok too)

Next, plug those numbers into a spreadsheet and watch what happens to your cash flow over time if all of your numbers stay exactly the same.

This is where you have a chance to identify which of your bills are “optional” or adjustable in some way. Where can you cut back or move funds from one thing to the next?

Maybe it’s more important to you at first to pay down your credit card and not put in that $$ to savings. Do it. You can adjust the amounts you put into each category over time as you get used to working with the cash flow spreadsheet.

Once you’ve created a spreadsheet with your numbers, the key is to keep updating it as these expenses actually roll in. Say you spent $155 on groceries this month instead of what you budgeted, notate that. You should be able to follow your budget down and have your “cash flow” column reflect what’s actually in your bank account. That way, when you do have inevitable deviations from your plan, you can see how those things affect your future budget and you can adjust accordingly. If you spent too much on one thing this month, cut back on something else next month to keep yourself in check.

Sure, your situation may change between now and three years from now, but looking at the overall picture as those changes occur helps you to prepare for whatever life may throw you.

On the positive side, if you get a raise in that time frame, you’re easily able to see what that additional income does to your overall budget and can plan what categories you’d like to add more funds to.  Did you want to put away a little more into savings?  Pay a little more towards your credit card?  Visualizing the bigger picture can help you make these plans.

Take a look at my example budget HERE.

This example budget shows how someone with a modest income of $35,000 and a mortgage or rent price of $1,300 per month can pay down debt upwards of $8,000 annually (in my example, $400 per month to credit card repayment and $250 per month toward student loan debt) and still manage to start a savings of $1,200 per year on top of that.

You can follow the budget down through the years and see how cash flow is affected by different budgeting decisions.

The bottom line – Putting your budget into a larger-scale view can really help you to lay down reasonable goals and find places in your daily life where you can make adjustments in order to make your goals attainable.