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How to Build a Monthly Budget November 23, 2009

Posted by General Zod in Advice, Money, Storytime.

Many years ago, when I was still in college, I decided to assert my independence.  I moved out of my parent’s house and started living on my own dime.  I was confident that knowing how to balance my checkbook was sufficient wisdom for knowing how to manage my finances.  Unfortunately, I had no idea how little I actually knew.  Without really meaning to, I managed to sink myself deep into 5-digits of credit card debt.

My bank balance was close to nil.  My rent was due.  My bills were piling up.  Collection agencies were calling regularly.  My electric was turned off a couple times.  And the contents of my refrigerator consisted of mustard and baking soda.

Real life was smacking me in the face.  I had to do something quickly or go home to Mom and Dad with my tail between my legs.  Not that I have something against my parents, but I was not about to admit defeat or beg for help.  (The men folk in my family tend to carry around a lot of pride.)  I had to do something fast.  I had to teach myself how to budget.

It saved me.

I examined my situation closely, and developed a set of behaviors to follow when dealing with my money.  I forced myself to become more aware of how much money I had, how much I was spending, where I was spending it, and what my financial goals were.  My methods are most likely not the best way of doing such things, but it has worked for me.

It did require that I make some changes, but nothing too dramatic altered my lifestyle.  My goal was simply to make sure my bills were getting paid, but it became more than that.  In a couple months, I found that I was SO MUCH HAPPIER than before.  My bills were getting paid regularly.  I found myself gradually climbing out of debt.  I found myself planning my purchases.  I was planning for the future.

Mind you, it didn’t happen over night.  There has been some trial and error involved.  It’s been over a decade since I started, and the results speak for themselves.  I’m ahead on my home mortgage.  The bills are always paid on-time.  My credit cards have a $0 balance.  My cars were bought for cash.  I have investments working for me, and emergency money in the bank.  Once again… SO MUCH HAPPIER!

BE AWARE that I am NOT a financial advisor.  I’m just someone who has been managing his own money for many years, and would like to share what I’ve learned.  If you do take any of my advice, then please do so at your own risk.  I can not make any promises to your success, but I do wish you luck.

One last point before we start.  You have to realize that this is not going to be something you can do overnight or just once.  Even after you’ve built your budget, you’re going to need to take responsibility for making suitable alterations to it as your needs change overtime.  Keeping your budget current to your needs and lifestyle is something that should be re-evaluated on a regular basis.

Don’t worry.  It’s not as difficulty as it sounds, and it’s really worth it!


Chapter 1:  How much Money is coming In?

So what to do first?

Before you can begin building your budget, you need to closely examine much money you’ve got coming in every month.

Examine your Monthly Net Income

If you are as lucky as I am, you have a salary position that guarantees you a steady paycheck from month to month.  However, I was not always in that position.  I started my career as an hourly paid employee, so I realize that some of you will have a harder time estimating your monthly income.

For the hourly paid people, your estimate does not have to be exact to start off with.  Take an educated guess at how much you bring home every month, and then you can re-evaluate those numbers in a month or two to see if your guess is holding fairly consistent.  However, you should NEVER assume that you will have a certain amount of overtime coming to you.  When you are preparing your budget, stick to your base income.  (Any OT that you earn will be extra money you can direct towards whatever you require at that time.)

For this article, I will be developing an on-going example to demonstrate what I’m talking about.  For this example, let’s assume a monthly Net income of $3,000.

Supplemental Income

Remember that when building your budget, we want to limit ourselves to reliable income.  Only count on the money that you KNOW you will be earning every month.  This could be from second part-time job, a monthly lottery winnings check, or anything that can be guaranteed as a regular, dependable influx of funds.

Refrain from depending on something you have no control over.  This may require you to make a few judgment calls.

For example… can a recently divorced woman consider her alimony check to be a reliable source of income?

Perhaps, but that depends on her ex-husband.  What if he does not have a stable job or reliable income.  If she has her own source of income, then she may not want to count on that alimony check when building her budget.  Then, when the checks do arrive, she will have extra money that she did not count on receiving.


Chapter 2:  Where does the Money Go?

The next thing you need to discover is where the money is being spent every month.

Examine your Monthly Bills

The first place to look is your checkbook.  If you have not yet made a habit out of properly recording your issued checks, then START IMMEDIATELY!  If you refuse to record how much you are spending, then just go home to Mommy now.  In the meantime, go dig up your canceled checks or check your statements online.

Determine how much your monthly rent and utilities come to.  Some apartment dwellers will find this part easier than homeowners will, since they may not pay for each utility individually.  Try to sample as much of your bill history as you can up to the past full year.  Then, find the average cost of each monthly bill for that time.  I always recommend examining up to a full year of your financial history as you will find that some of your bills will vary from month-to-month and season-to-season.

For example, your natural gas utility bill will probably be a very low $10/month during the summer season, but may rise to hefty $90/month while heating your home during the winter season.

For our continuing example, we’ll save that the 12-month average of the gas utility bill will come to $30 per month.  By putting aside $30 even during the summer months, you’re preparing yourself for the heavier expense of the winter season.

Don’t bother examining your bill history back past one year.  Inflation has a tendency to drive prices higher as time goes by, and your style of living may have changed as well.  Going back further than a single year will probably just cause you to miscalculate your current needs.

After gathering our estimates, let’s assume the following information for our on-going example.

Monthly Income = $3,000

Mortgage = $1,000
Electric Utility = $150
Water Utility = $50
Gas Utility = $40
Telephone = $30
Cable TV + Internet = $90
Auto Insurance = $160

Total Monthly Bills… $1,520

Leftover Money = $3,000 – $1,520 = $1,480

For the first month, we are going to keep it real simple.  Set aside the money needed to pay your expected bills and place the rest of your money into a single large allotment (which is indicated above as “Leftover Money”).

Don’t get excited.  It looks like you have all this money to spare, but you still need to consider all the other things you normally spend your money on.


Chapter 3:  Your Spending Habits

Like the ebbing tide, money seems to have a way of flowing quickly away.  During the first month, you are going to gradually watch the balance of your “Leftover Money” slowly diminish.  You still have many expenses to think about like eating, fueling your car, buying clothes, etc.  We are going to start tracking your spending and eventually dice up this “Leftover Money” into smaller allotments.

Documenting your Expenditures

With the money for your bills set aside, you know how much you have left over to spend on everything else.  However, what you do not yet have is a clear picture of where all of your money is going.  Therefore, during this first month, you will NEED to accomplish 3 tasks.

  1. Document everything you buy.
  2. Find out how much you owe on your credit cards.
  3. Find out the cost of any subscriptions or monthly memberships fees that are billed to you.

Why a whole month?  You can not determine how much your average monthly grocery bill will come to just by making one trip to the store.  Your first trip may only require you to buy milk and bread, but the second trip could incur a cost into the triple digits.  In fact, you can NOT determine your average monthly spending from a single month of purchases, but at least it will give you a good baseline to start judging your future against.

So, starting tomorrow you need to DOCUMENT EVERYTHING!

I don’t care if you do it in a ledger or in a spreadsheet or on your kitchen wall.  Make a point of writing down where EVERY SINGLE PENNY of your money is spent.  If you buy something, then get a receipt and stick it somewhere safe.  If you are not given a receipt, then write one for yourself.

If you have to hand write a receipt, then note down the date, what you bought, where you bought it, and how much it was.  (I keep a pen and a pad of post-it notes in my car for just this purpose.)  All of this information will be critical to the development of your budget at the end of the month.

Do this for EVERYTHING that you exchange money for; regardless of the cost (even if it’s a mere 25¢ for a gumball).  There are no insignificant expenses.  You are going to need to know ALL of it if you want to get an accurate picture of how you spend your money.

“… but I don’t see why I need to write down every little thing?”

Look.  You need to take this seriously.  If you are going to slack off on something as easy as taking a few notes, then you’re obviously not serious about doing this.  If that is the case, then go sit yourself down on the couch with a pre-cooked microwave dinner, tune your TV to the Home Shopping Network, and start impulse buying; because all you’ll ever be is a good consumer.

You didn’t like that, did you?  GOOD!  I’m not writing this to be nice.I’m writing it to help those who need and want the advice.  If you’re reading this, then you probably think you the help.  It’s up to you to take heed of the advice given.  So stop your whining and just do it!

Make a habit of collecting your day’s receipts into a single location.  Most men use their wallets for such storage, and women will probably single out a spot in thier purse for receipts.  This sounds kind of strange, but I prefer to wear “pocket” t-shirts just so I have a place to keep my receipts.

At the end of each day, take a minute or two (because that is all the time it will take) to document how you spent your money onto a more permanent venue.  I prefer to use an Excel spreadsheet for documenting my budget and all my purchases.  You use whatever method works best for you.  Just write them down in a big, long list.  Then, deduct that amount from your “Leftover Money” allotment so you will have a good indication of how much is left.  Remember, that money has to last you for the entire month!

For our on-going example, let’s make some sample entries that reflect the purchases of a few days.

11/01 – OfficeMax – Ink Cartridge for Printer – $19.49
11/02 – Best Buy – Jackie Chan DVD – $12.95
11/02 – Super Fresh – Groceries – $95.37
11/03 – Exxon – Gas for Chevy – $27.84

I document my expenditures in this way every single day.  I recommend that you start doing the same today… and for the rest of your life.  It seems like a bother now, but after that first month it will have become part of your regular routine and have become a habit by that point.


Chapter 4:  Debt and Automated Fees

There are probably more “automatic charges” being applied against your credit cards and bank accounts than you realize.  It’s time to investigate those charges.

Balance Owed on Credit Cards

Before the end of your first month, you need to find out exactly how much money you owe against your credit cards.  I am leaping to the assumption that you have a fair amount of credit card debt, because that is how most people get themselves into trouble.

If you have a current copy of your bill on-hand, then you can get that information from there.  If not, then either go online or call the financial institution(s) which you have been financially supporting.  (I recommend calling the “Customer Service” phone number that is listed on the back of your credit card.  The support representative can give you the balance due information on your account.  And while you have them on the phone, ask them if there’s any chance you could have your APR lowered!)

Let’s go with these examples:

Owed on Visa #1 = $1,612.94
Owed on Visa #2 = $4,902.11

Subscriptions and Membership Fees

Finally, you should take an inventory of any automatic charges that are applied to your credit card(s), determine how much that monthly cost is, and decide if that service is really worth the money.

In today’s streaming online digital world, there may be other ways to acquire the same services for little or no money whatsoever.  Investigate thoroughly to make sure you find all of them.

For our example, let’s say we found the following automatic charges:

Local Newspaper Subscription = $17/month
Magazine Subscription = $60/year
Gym Membership = $90/3-months
Weekly Aerobics Class at Gym = $12/month
AAA Membership = $120/year


Chapter 5:  Analyzing the Information

So now the first month has ended, and you should have a very long list of everything you have bought over the past 30 days.  We’re now going to review all of the data you have collected.  Get comfortable, because this could take a bit of time.

I’ll start off my reminding you of the contents of my on-going example.

Monthly Income = $3,000

Mortgage = $1,000
Electric Utility = $150
Water Utility = $50
Gas Utility = $40
Telephone = $30
Cable TV + Internet = $90
Auto Insurance = $160

Total Monthly Bills… $1,520

Leftover Money = $3,000 – $1,520 = $1,480

11/01 – OfficeMax – Ink Cartridge for Printer – $19.49
11/02 – Best Buy – Jackie Chan DVD – $12.95
11/02 – Super Fresh – Groceries – $95.37
11/03 – Exxon – Gas for Chevy – $27.84

Credit Debt:
Owed on Visa #1 = $1,612.94
Owed on Visa #2 = $4,902.11

Automatic Credit Card Charges:

Local Newspaper Subscription = $17/month
Magazine Subscription = $60/year
Gym Membership = $90/3-months
Weekly Aerobics Class at Gym = $12/month
AAA Membership = $120/year

Categorize your Expenditures

Now we will examine the money you spent out during the month, and group the expenses into some kind of order.  To start you off, I’m going to recommend the following categories.

Pocket Money – Carrying around money for yourself, your spouse, allowance for the kids, etc.

Food – Groceries, Restaurants, etc.

Transportation – Petrol, Motor Oil, Bus Faire, etc.

Health Care – Doctor Visits, Dentist, Labs, etc.

Repairs – Auto, Home, etc.

Education – College Tuition, Books, etc.

Subscriptions – Magazines, Memberships, etc.

Fun – Movies, Dates, New Toys, etc.

Aside from your regular bills, you can probably pigeon-hole most of your regular expenses into one of these 8 categories.  Feel free to make up own categories as needed, but try to generalize.

I find it wise to give each individual person an allotment of “Pocket Money” and to keep a separate allotment for “Fun”.  This will give each person the freedom to spend their money however they please, and the “Fun” budget will ensure that no one person will be responsible for footing the bill to take the family out to see a movie.

After you’re done categorizing all your expenses, then add up the contents of each category, and round the values off to the nearest $10 mark.  These will be the values we will use for next month’s budget estimate.

To continue our example, let’s say I ended up with totals like these:

First Month Expenditures

Jack’s personal Spending = $92.24 (Budget: $100)
Jill’s personal Spending = $101.02 (Budget: $100)
Fun = $197.49 (Budget: $200)
Food = $504.12 (Budget: $500)
Transportation = $122.28 (Budget: $120)
Health Care = $65.37 (Budget: $65)
Repair Costs = $42.97 (Budget: $40)
Education = $317.95 (Budget: $320)

Analyze the Subscriptions and Membership Fees

Next, figure out how much you pay every month for each automated credit charge.  Average off the costs to the nearest dollar, and add up those values.

Local Newspaper Subscription = $17/month
Magazine Subscription = $12/year = $5/month
Gym Membership = $90/3-months = $30/month
Weekly Aerobics Class at Gym = $12/month
AAA Membership = $120/year = $10/month

Approximate Monthly Auto Charges = $74

Analyze your Credit Card Debt

Above we’d sited this example:

Credit Debt:
Owed on Visa #1 = $1,612.94
Owed on Visa #2 = $4,902.11

I’d like to make a point here, so let’s do a little experiment.

Reach into your pocket and pull out a $20 bill.  Got it?  OK.  Now, throw that $20 bill into the trash.  No?  You think that’s a stupid thing to do?  You’re right!

However, that is exactly what you are doing by carrying over long-term credit card debt from month-to-month.  You are paying for the privilege of using someone else’s money to buy things… it’s called “interest”.  Carrying around an on-going pile of debt is going to put you deeper in the hole than you ever dreamed of sinking.  Let’s do a little math to demonstrate.

Let’s pretend you have recently purchased many odds and ends on your credit card, and managed to run the balance due up to $4,000.  You’re thinking… “No sweat!  I can get that paid off in a couple years.”  However, you don’t consider the consequences and start making minimum payments on your bill every month.

Now… let’s make a few assumptions about what happens next.

1.  Assume that you never buy anything on this credit card ever again.  You spent your $4,000 limit, and then you cut the plastic up.

2.  Assume that you always make your payments on-time, but never pay more than the minimum payment due.

3.  Assume that your minimum payment due each month is 2% of the debt balance, but never less than $10.

4.  Assume that you are suffering under a hefty 18% interest rate on your outstanding debt.

So after the number crunching…
How long did it take to pay off that debt?
And how how much did it finally cost you?

Using the information above, you can determine that it would take you OVER 42 years to pay off that $4,000 of debt, and in the end, it will have actually cost you a little over $14,800.

Sickening, isn’t it?

So what’s the answer?


Chapter 6:  Fixing Debt and Start Saving

Now is the time to start digging yourself out of that debt and there’s only one way to do that.  You’re going to have to sacrifice some things to pay it off.


Don’t bother considering filing for bankruptcy unless you REALLY need to.  In 2005, changes were implemented in the bankruptcy laws that have made the whole process much more difficult.  If you try it, then be prepared to have you life put under a magnifying glass during a prolonged investigation of your assets, income history, and personal lifestyle.

Credit Card Payments

If you can’t pay off the balance of your credit card, then at least pay something more than the minimum due.  Even if it’s an extra $20, it will help a lot in the long run.

In the example I sited previously, it would have taken you nearly 42 years and $14,800 to pay off a $4,000 debt.  By adding an extra $20 to your monthly payments, you would manage to clear that debt in a little over 11 years, and the resulting cost would only run you $7,700.

If you still think that this sounds like too much to pay… you’re right, but compared to the first example, you just saved yourself about 31 years and $7,100.  Not a bad deal for the cost of a daily cup of coffee.

I intend to write additional articles in the future in which I will detail nifty new ways you can reduce your monthly expenses, so stay tuned!  In the meantime, let’s concentrate on just paying the bill.

In our ongoing example, we assumed a total credit card debt of $6515.05 ($1,612.94 + $4,902.11).  Our next 2% minimum payment would be approximately $130.  Add $20 extra to that amount, and we’re going to set our monthly credit card expenditure at $150.

Keep in mind that this is ONLY for the existing debt you already have.

Here are 2 tips…

  1. If you have the money to pay for something, then don’t use your credit card.  Adopt a “cash on the barrel head” philosophy.  If you pay for it, then they can’t charge you interest.
  2. If you do make purchases on your credit card, then that money has to come from somewhere… that money isn’t free.  So create an extra column on your budget called “Credit Card Purchases”.  Whenever you buy something on credit, deduct the money from the relevant allotment column and add the same value to “Credit Card Purchases” column.

    Since you’ve now set that money aside, you can send the ENTIRE total of from “Credit Card Purchases” (in addition to your usual payment) the next time you send a payment.  There’s no reason to pay interest on a purchase if you don’t have to.

Want another tip?

As you pay off your long-term debt, the minimum payment due will start to decrease.  It’s tempting to reduce the amount of money that you normally set aside for this, but DON’T unless it’s absolutely necessary.  If you have $150 budgeted for paying against your debt, then pay $150 towards it for as many months as you can until it is paid off.  The faster you can clear that debt the LESS you’ll pay in the long-run.


Have you ever been hungry?  Have you ever been in a blind panic over where you’re going to get the money for rent?  Or your car payment?  Or the grocery bill to feed your kids?  If you’ve ever been fired from a job before, then there’s a good chance that you have an idea of what I’m talking about.

It is actually kind of sad that more people do not take their finances more seriously.  I don’t really think it’s necessary to actually say this, but I’m going to say it anyway.

It is necessary to plan for the future.  This is part of what it means to be a responsible adult.

Most folks have thier paycheck deposited into thier checking accounts, and pay all of their bills out of that lump sum.  I recommend a slightly different strategy.  Get a savings account in addition to your checking account.  Then, either through your bank or the direct deposit your employer provides, arrange for 10% of your take-home paycheck to go into that savings account automatically.  I know that that can be difficult for some people to afford, so if you can’t do 10%… then do 5%… or 2%.  Do something.  Even saving a seemingly insignificant 2% is better than saving nothing at all.  Then, just pretend that the savings account isn’t there.  Ignore it until an emergency arises.  You’ll be glad you did.

For our on-gong example, we’re going to set ourselves a small initial goal of saving 5% of our net income each month.  Since we have already assumed a monthly net income of $3,000, we know that this means we are going to need to try to put aside $150 per month.

Right about now, there are many of you thinking that it would be better to take that money and pay it towards getting out of your credit card debt.  You’d be wrong.

Yes.  I seem like I’m contradicting myself, but you MUST save some money as an emergency fund.  What happens if you lose your job before getting that debt paid off?  You’ll have absolutely no money saved up, you’ll have to skip payments, and you’ll start accruing late fees.  You’ll probably also be forced to fall back on your credit cards again… and you’ll be right back where you started.

Saving money for a rainy day is just as important as getting out of debt.  Try to put a little towards your savings each month, and increase that amount as you find yourself more financially stable.


Chapter 7:  Crunching the Numbers

Let’s do the math on what our sample budget looks like now.

Monthly Income = $3,000

Mortgage = $1,000
Electric Utility = $150
Water Utility = $50
Gas Utility = $40
Telephone = $30
Cable TV + Internet = $90
Auto Insurance = $160
Total Monthly Bills… $1,520

Jack’s Pocket Money = $100
Jill’s Pocket Money = $100
Fun = $200
Food = $500
Transportation = $120
Health Care = $65
Repair Costs = $40
Education = $320

Automatic Monthly Credit Card Charges:

Local Newspaper Subscription = $17/month
Magazine Subscription = $5/month
Gym Membership = $30/month
Weekly Aerobics Class at Gym = $12/month
AAA Membership = $10/month

Monthly Credit Card Debt Payments = $150

Monthly Emergency Fund Savings = $150

Total Monthly Expenses = $3,449

End of Month = $3,000 – $3,449 = (-$339)

In the words of Douglas Adams… DON’T PANIC!

If you do discover that you are spending more than you make every month, then look at the bright points of your current situation.

  1. You now have an idea of how much you are sinking into debt each month.
  2. You now have the means to make conscious changes in your spending habits that will remedy that problem.

Fixing the Negative Balance

If you are spending more than you earn each month, then there’s no surprise as to why you’re finding yourself slipping deeper and deeper into debt.

I cannot tell you what to cut out of your budget, but I am going to make some sample recommendations.  Deciding on what to cut is something you’ll need to decide for yourself.

Everyone’s first instinct is to eliminate the “Fun” allotment from the budget.  Well, you can cut it down if you want, but don’t eliminate it.  Everyone needs to have a little fun in their life.  Otherwise, you’ll end up being miserable… and that’s not why we are doing this.

Instead, think about what small changes you could make that would have a significant impact on your monthly spending.  Some changes may seem so innocuous, but they can make a significant difference.

Here are some examples:

  • Can you cut down some of your monthly food costs?  Make a few meals from scratch.  Eat more pasta, and stop buying those beef and cheddar Hot Pockets that you love so much.
  • Do you really go to the gym often enough to justify having a membership?  If not, then cancel it.  Do pushups and abdominal crunches in your living room, and go jogging around your neighborhood.
    And how about that Aerobics class you’re paying for.  Do you really need to go to a class?  Guess what… you can find aerobic workout videos online.  There are THOUSANDS of them available on YouTube alone.  Save yourself some cash by working out in front of your computer instead of an instructor.
  • Don’t feel like you always need to take your date out to dinner and a movie.  Once in a while, earn sensitivity points by making a (sorry guys) romantic home-cooked meal, and then curl up under a blanket together to watch a movie that she picked out.
  • Are the newspaper and magazine subscriptions a necessity?  Can you do without them for a year while you start to climb out of debt?  Try reading the news online instead.
  • Turn down your thermostat in the winter.  Wear socks and sweaters to compensate for the cold.
  • Stop putting 93 octane gasoline in your fuel tank for a while.  Switch to buying 87 octane.  Then, start shopping around for which station has the least expensive gas for sale.  It can change almost daily, so keep your eyes open.  Also, do you really need to do so much driving?
  • Do you really need all those cable channels?  Cancel that “Monster Sports Channel Package”, and switch to a simple basic cable plan.  You can still get all the scores off of ESPN.

    Also, can you get better pricing by switching over some of your services to a single vendor offering bundled services?

  • You can’t really economize on the cost of college courses, but consider buying used, rather than new, books.  Use pencils rather than expensive pens.  Save on paper by using both sides of the page.
  • Remember that you pay extra for name recognition.  Do you really need to buy “Kraft” cheese or “Wonder” bread or whatever?  Maybe you do… but if not, shop around for inexpensive alternatives.  Most major grocery store chains usually carry an economy alternative of most common items.  Try buying them for a few months, and experiment with what changes you can make without compromising your personal satisfaction.
    And while you’re at the store, remember to check out the store circulars for sales.  Get a free store card to cash in on some of the card-specific sale items.  And try to think of using coupons whenever possible.

Trim down what you can.  Then, take a second look and trim it down some more.  You’d be surprised what you can live iwthout comfortably (even if you don’t want to).  Keep doing this until your first monthly budget comes out in the black.

Monthly Income = $3,000

Mortgage = $1,000
Electric Utility = $150
Water Utility = $50
Gas Utility = $40
Telephone = $30
Cable TV + Internet = $90
Auto Insurance = $160
Total Monthly Bills… $1,520

Jack’s Pocket Money = $50
Jill’s Pocket Money = $60
Fun = $100
Food = $500
Transportation = $100
Health Care = $65
Repair Costs = $40
Education = $300

Automatic Monthly Credit Card Charges:

AAA Membership = $10/month

Monthly Credit Card Debt Payments = $150

Monthly Emergency Fund Savings = $100

Total Monthly Expenses = $2,995

End of Month = $3,000 – $2,995 = $5

With your “adjusted” first monthly budget, you now have some guidelines on how you spend your money.  Just remember…

  • Keep documenting your purchases!  We’ll be adjusting these numbers each month for at least the first year… and then at least once or twice a year after that.
  • If you don’t spend all the money in a specific allotment, then do NOT give into the temptation to move that money into another category.


Chapter 8:  Changing from Month to Month

Now that you have built and tweaked your first budget, your second month is going to seem SO MUCH EASIER.  However, as you move from month to month, there are four VERY important points that you must keep in mind.

  1. Don’t use your bank account balance as a guideline of you much money you have to spend.

    When the start of each new month comes around, you will need to crunch some numbers, and may believe you have more money in the bank than you think you do.  Keep in mind, that some of that money has already been spent.

    Check to see how much of that belongs to checks that have not yet cleared.  Did you deduct the amount of last month’s credit card purchases?  (You bought the items, but you haven’t PAID for them yet!)

    Also, have you written any checks that haven’t cleared yet?

  2. Keep documenting your purchases.

    Keeping track of your purchases should have probably become an instinctive part of your daily life by now.  Just remember to keep it up!


    If you have a budget item of $100 set aside for “Clothing” each month, then stick to it.  Do NOT borrow money from other places to buy that new pair of sexy boots that you’re currently drooling over.  If you want something bad enough, then save for it.  Roll this month’s $100 into next month so you’ll have $200 for next month.

    It can be very tempting to just move the numbers around mid-month to accommodate a want or desire, but that can get dangerous.

    I did it a couple times, and always ended up regretting it.  Once in particular, I let my impulsiveness get the better of me and I spent a large percentage of my grocery money on jewelry for my (former) girlfriend.  (I was eating at her house a lot, so I didn’t think it’d be too big of a deal.)  She broke up with me and disappeared soon after (taking the jewelry with her) and I spent the next few weeks living off of Raman Noodles and tap water.  (Can you say scurvy?)

    Don’t feel that this is a completely ridged budget.  Some items will require judgment calls on your part.  If you buy new brake pads for your car, does that expense fall under “Transportation” or “Repairs”?  Does taking your wife out to dinner out fall under “Food” or “Fun”?  There are no hard and fast rules to categorizing your purchases, so you make the call.  Just remember to be consistent.

  4. Transfer the Column Balances into the Next Month

    When migrating from one month’s budget to the next, you will need to transfer the outstanding balances from each budget category into the following month.

    If you have $500 set aside each month for “Food”, but only spent $450 in September, then you should transfer that extra $50 into the following month’s budget.  (The next month may require 5 shopping trips instead of just 4, so that money might be needed.)

    The most important transfer to make would be the sum of any credit card purchases you have made during the month.  Provided you haven’t been cheating, you should have ALL of the money to pay for your recent purchases still in your bank account.  So when you write your regular credit card payment check… then add in the sum of the new purchases as well and eliminate that debt immediately!

In our example, we’re assuming to pay $150 towards our credit debt each month.  Then, we made an additional $132.17 worth of purchases on your credit card.  You haven’t been cheating, so that money is waiting to be used in the bank.  So add those sums together… and write the credit card payment for a sum total of $282.17.  PRESTO!  Your new purchases are paid for and will not be accumulating unwanted interest!


Chapter 9:  Thinking towards the Future

After a couple months have gone by, you’re going to need to…

Re-evaluate your Budget

You will need to re-evaluate your budget from time to time.  In the beginning, you only sampled one month of your purchases.  I can guarantee you that your financial needs will change over time.  Make a point of rebuilding your budget every 2 or 3 months for the first year, and then at least once every 6 months from then on.  If you don’t keep up with it, then your budget will go out-of-date, and you’ll eventually end up putting yourself into financial difficulties all over again.

It takes me an average of 2 minutes per day to keep my budget current.  When I re-evaluate my budget every half-year, the sum total of the work only takes me about 30 minutes.  I don’t think that that’s too much to ask of yourself.

Setting Goals

One of the biggest mistakes I see people make is impulse buying expensive new toys while holding onto the illusion that they can “make it up later”.  Throwing down a few hundred dollars for a new PDA/Guitar/Blu-Ray disc player or whatever, does not sound like it would be so devastating to your budget.  However, when you’re money is stretched tight to begin with; it can be hard to dig yourself back up out of that unplanned hole.

For those special trinkets that you just cannot live without, I recommend you plan for them.  Create a new entry in your budget for whatever it is you want to buy in the future, and allocate a bit of cash to it each month.

My personal budget has a frivolous column called “Toys” into which goes a small, but regular, flow of funds.  Then, should I find something I want to buy, I’m well prepared to do so.

Planning for your large purchases just makes financial sense.  Plus, there is the added bonus of forcing yourself to wait before buying.  This gives you time to reconsider the purchase.  You might change your mind before you save up enough to buy the item which means you can spend that money on something else.

In my past, I have made many impetuous purchases which I was very excited about at the time, but only regretted a mere month or two later.  I used to have a Palm m505 which seemed like a brilliant purchase at the time.  I splurged and went with the snazzy color display and everything!  However, a couple months later, I found that I could not be inspired to use it very much… and I mostly considered it a useless burden to carry around.  Later, it sat on a shelf for a little over a year, and then was unceremoniously entrusted to one of my cousins.  (He was thrilled to get such a high-tech toy… and I was happy to not have a reminder of my wasteful spending laying around the house.)


Chapter 10:  Denouement

See… that wasn’t so hard.

While I was writing this article, I was asked to demonstrate how I keep track of my personal budget.  In case any of you are interested, click the image below to see a larger view of an example of something similar to what I use.


I know… it’s not Quicken… but it keeps my numbers balanced and suits my needs.

If you want to become more financially stable, then you’re going to have to make this process (or some variation on the theme) a part of your on-going lifestyle.  The first month is the hardest part… after that, it’ll be one of the easier things you do in your life.

In today’s world of expensive blue-tooth gadgets, high-priced petrol, and 50-year mortgages; the ability to budget is not just another chore.

It’s a survival trait.



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