Budget, Emergency Fund

Get Out Of Debt – A Better Budget

I recently wrote about our debt reduction process – a simple one-page guide to getting out of debt.

Step 2 of our process was:

We created (and followed) a zero-based budget. We “spent” our paychecks, on paper, at the beginning of each month, so that we would know where our money was going to go.

I thought I would elaborate a bit on our budgeting process – and some tips that work for us.

We break our budget into three major categories: spending, saving and giving.

Within those categories, we try our best to estimate upcoming monthly expenses.  We save for annual expenses (such as insurance premiums) and quarterly expenses (such as our car insurance premiums).

The easiest way to save for a non-monthly bill?  Divide the amount due by the number of months until the due date – and that’s the amount to put into savings, each month.  When the bill comes due, you’ll have enough in savings to pay it, and you can avoid the “shock” of that non-monthly expense.

I am the math-nerd in our family, so I do most of the budget creation – buy my wife also plays a very important role.  She’s very practical – and often understands more about the day-to-day needs of our family.   So, after I create our first-draft, she looks it over, suggests changes, and then we finalize our budget.

After all of these years, we still use the good old envelope system to manage our cash.  It works for us for day-to-day transactions – but we also use our debit cards.

I have tried (and liked) various budgeting software programs, but the real truth is, our finances are so simple at this point, our budget is just a simple spreadsheet.

My wife and I both receive monthly paychecks – and I make some irregular income, throughout the month.  All irregular income is placed into our savings account so that it is available for unplanned-for expenses (or cool stuff that we just want to buy).

We make contributions pre-tax to our retirement plans, so we don’t technically “budget” for those funds.

I do my level best to pay all of my bills on the first day of the month.  We use online banking through our local bank to pay most of our bills.  I think we write 2 checks per month, for local services.

We try to stay on top of things – and to remember irregular expenses and possible category changes.  Recently, our oldest started driving (yikes!) and we had to change our allocations for gasoline, insurance, car repairs, car replacement, etc.

Our kids have their own money – from gifts and working around the house – and we have taught them to use this same system.  Our older two are brought in as we discuss the budget, and they often have great ideas for saving money and allocating our funds.

We include debt reduction (paying off our mortgage) under the spending category.  If we had many debts, we might create a fourth major category – debt reduction.

Creating a zero-based budget – and “spending” every dollar before the month begins – really helps us stay on track.  Please subscribe to No Credit Needed via daily email or rss – and follow me via Twitter and Facebook – for more content.  Blessings.