FixIt

I think that one of the biggest problems people have when it comes to budgeting their money wisely is that they are not aware of how much they are spending until it is too late.  I have a simple method for watching how much money I spend and making sure I have enough for essential expenses and building savings.

Step 1: Estimate your regular monthly expenses

The only expenses I put into this category are my rent and utility bills.  Anything you have to pay on a regular basis goes into this total.  We’ll worry about expenses such as food and gas later.  Credit card payments go here if you have a large balance to pay off.  Make sure you allocate at least enough for a minimum payment, and more if you can.

Your utilities will obviously change by a little bit each month, but it doesn’t matter.  After adding up normal expenses, round up.  My rent and utilities come out to about $450 in the worst months, so I use $500 as my number.

Step 2: Estimate your monthly income

This step is easy.  Add up whatever money you get in your paychecks each month.  If your hours fluctuate some months, pick the smallest reasonable amount you can expect to make.  We want to make sure you don’t run out of money, so round down to a nice number.  This will help make sure you have extra money left over each month. As a student worker, I make about $1050 a month, so I round to $1000.

Step 3: Figure out how much to save for your monthly bills

All you do here is figure out what percentage of your paycheck has to go towards bills.  $500 / $1000 = .5, or 50%, so half of my paycheck is dedicated to bills.  I keep track of how much money in my account is dedicated towards bills and how much is free, but if you don’t trust yourself not to touch it, or simply don’t want to have to keep track of as much, open a new checking account.  Most banks offer free checking accounts if you give up interest.  When you cash your paycheck, make sure that the right amount goes into your bill payment account.  Don’t touch this money for anything other than paying the bills you counted up in the first step.

Step 4: Use leftover bill money to pay off debt or invest

Because you overestimated the cost of your bills and underestimated your income, you should have money left over in your bill account after paying all of your bills.  If you have credit cards to pay off, put all of this money toward them.  Having no credit card debt will greatly reduce your financial burden.  If your credit cards are paid down, then invest in a retirement plan.  The key is that this excess money was already allocated to bills, so you won’t miss it when it goes towards credit cards or investments.  I tend to have about $75 left over in this account each month.

Step 5: Monitor your daily expenses

Anything that wasn’t covered in step 1 has to come out of the rest of your paycheck.  The two biggest things in this category for me are food and gas.  I don’t have a set strategy for budgeting this money, but knowing how much you have left and how long it has to last you helps keep you from overspending.  Because you can’t touch the money saved for bills, you know you can safely use all of the other chunk of your paycheck however you want, as long as you have enough to get by till your next paycheck.

If you have trouble keeping track of how much money you have left, you could try only using cash.  I don’t like to carry that much cash around, but it does give you a nice visual way of telling how much you have gone through.

Step 6: Save the leftovers

When you get a new paycheck, take whatever money is left for your daily expenses and put it in a savings account or towards credit cards or retirement.  If you let it accumulate with the rest of your daily expense money, you will be tempted to overspend next pay period.  I make it a goal to have at least 10% left over at the end.  This makes it feel less like you are living paycheck to paycheck and helps build savings faster.