Doing a Budget

Last week I covered the Debt Snowball and mentioned that you needed to have a budget, so this week I’ll cover how to do that.

Bah! Why are you covering this? I know how to do a budget!

Really? Off the top of your head, what’s your monthly budget for clothing? Groceries? What’s your budget for gas? Not, “Oh, I usually spend about…”–that’s not a budget.

A budget is where you declare “I have $300 to spend on gas this month, and I will not spend any more than that.”

What we do, and what Dave Ramsey teaches, is called a zero based budget. Basically what that means is we know where every single dollar we make is going to go before we get paid. So you “spend” your entire paycheck the day you get it. Using this method, if you go over budget in one category, you have to take that money from another category because by now you’ve stopped using credit cards.

So if you had $300 budgeted for gas, but with 5 days left in the month you have 1/8 of a tank, you’ve got to take money from somewhere else. Perhaps clothing or “blow money.” And next month, plan better :D.

Here are the basic categories I used when I was single and doing this plan all by myself:

• Groceries
• Fuel
• Bills
• Rent
• Utilities
• Insurance
• Cell Phone
• Blow money
• Debt Reduction
• Visa
• Mastercard
• Car Payment
• Student Loans

That’s a pretty simple list. It is a good starting point, but if you want something a little more detailed, check out this budget form from Dave Ramsey.

A note about Blow Money: This is your walking around money. This is where you pay for renting movies, going out to dinner, and hitting the range. I discovered that I could get by with $60 a week in blow money and that has been my amount for several years. My wife gets the same amount even though she doesn’t make as much as I do. (That suppressor I bought recently was bought with blow money I had been saving since January)

A major component to the budget is the envelope system. What that means is that for certain categories you take cash out of the bank and put it in envelopes. When I started, I used cash for groceries, fuel, and blow money. Pretty quickly I learned that paying cash for fuel totally sucks so I stopped doing that. Now I use a debit card at the pump.

I did kind of a weird thing with regards to bills. I opened a second checking account and paid all my bills using that account. I signed up for auto-payment wherever possible and used online bill pay. The only check I had to write was to my landlady. I knew how much my monthly bills were going to be so I divided that by two and deposited that amount into the bills account every payday. It worked out really well for me and we still use that system today.

So this is how it looks on payday. Let’s say you get paid twice a month, and your paycheck is $1670 (speaking of which, you have stopped your retirement contributions, right? That’s not until step 4). Here is what it looks like:

• Go to the ATM. Take out $100 in cash for groceries and $120 in cash for blow money.
• Transfer $800 to the bills account
• Apply $500 to The Debt Snowball

You now have $120 in your pocket and $150 in your primary checking account for fuel. In an envelope you have $100 to buy the next two weeks’ worth of groceries. The rest of your paycheck has been spent.

Now, I don’t know what your situation looks like, but this is the basic idea. To get your numbers, go through your bank and credit card statements for the last six months and see where you spend your money. You might be surprised, as I was, at where all your money has gone!

When I did this, I discovered that while I thought I was spending $80 a week on groceries, I was actually spending almost $300 a week–because while at the grocery store (which was Wal-Mart because that’s your choice when you live in Mississippi) I was picking up things like DVDs and the occasional digital camera. The other thing that really surprised me was how much less I spent if I used cash. There’s something psychological about it.