6 Steps to Starting a Budget

So the bank has clearly let you know you're in the red.  Even if you aren't barraged with phone calls from late-night angry creditors, living from paycheck to paycheck is not a wise long-term plan.  

You probably know your need for a financial overhaul, but don't know where to begin.  Your pre-plan step is admitting your (literal and figurative) deficit.  You might even need to seek guidance from a support group.  But give budget planning a little time--see just how far you can stretch a buck with some forethought.

Step 1: Write down every debt you have in one column of a spreadsheet.  Leave nothing out. That CD player charged to your Radio Shack credit card fifteen years ago?  Write it down.  Student and car loans count as debt too.  I know this is tantamount to stepping on a scale.  But if you can't accurately describe the ugly beast in the mirror, you'll never be aware of the need to change.  Totaling up the damage must come first.

Step 2: Add a second column to your spreadsheet that includes your regular and irregular monthly expenditures.  Include everything from the utility bill and medical bills to food and gas.  A couple of hints to help you include everything:

• Keep all receipts and bills for one month.  Buy a spike receipt holder or empty basket and put each bill of sale in it religiously. This means caffeinated drinks and last minute bean burritos too.
• After one month separate the variable costs (food, gas, clothing, etc.) with fixed costs (insurance, mortgage).
• Carefully inspect your variable costs.  The good news is you'll easily be able to cut more and more each month.  Set a goal for expenditures under each category and check it after the second month.

Step 3: List all sources of income in another column to the right.  After totaling your monthly bills, you'll have a good idea of how much money you have to pay off the debt.  If you have hardly anything left over for debt payoff, something has to give on your expenditures.  Car payment?  Sell it.  Even if you're in the red.  Buy a clunker and pay off the rest--you'll be better in the long run.  You might need to sell the house and rent or lower your rent.  Getting a second job for a few months may also be a wise course of action to jumpstart things.  This temporary pain is just that.

Step 4: Before you start slashing things and mixing numbers around, you need a small cushion of a few hundred dollars in the bank.  If you don't have it, the clouds will definitely roll in.  Do this before attacking your debt--and, no, you may not use it for a "last minute" vacation or "desperately" needed shoes.  Leave it for car repairs and health needs.

Step 5: Make an appointment with your family or with yourself--put it in your phone with a reminder--to review the month's receipts and track your progress.  After three months you should have a firm budget in place that includes all income and outcome.

Step 6: Pay off debts one at a time a la Dave Ramsey starting with the smaller bill first.  Shuttle minimum payments to all other loans while aggressively attacking the smallest one.  After that is completed, pay off the next smallest with the same intensity.  You'll be surprised to see how quickly the bills are paid off when you gain momentum.

The most vital part of this process is following through.  If you do it half or even three-quarters of the way it's not enough to make a radical change in your spending habits.  With a projected plan of financial action, living by a budget is like training for a marathon.  Rather than wandering into the gym every so often to bench a few reps you are strategically planning for improvement with clear goals each week.  Keep running the race to become a lean, mean, spending machine.