In the last post, I told you guys I would post a little series on how I got out of debt. The first thing I did was prioritize my goals and write them down in black and white. Now, let’s move on to step two.

I Made a Budget – Money 101: Lesson 2

While most people are quite happy to pretend they don’t need a budget, it is a necessary evil. I used to be one of those people and I was quite surprised by the amount of money I was just throwing away. Thinking back to the amount of money I could have saved myself if I’d been just a tad more financially aware of my situation still makes me growl in frustration. Nevertheless, I wanted to look forward and make sure I wasn’t repeating those mistakes, so I forced myself to sit down and make a budget.

Step # 1 – Listing expenses

For the record, how you approach making a budget is completely up to you. I chose to start with listing my expenses before looking at income because I wanted to be 100% honest. I didn’t want to “pretend” I was living within my means when I knew perfectly well I wasn’t. But, it’s whatever works for you.

So, I pulled out more pen and paper and sat down with the last three months bank statements. I calculated all of my expenses and wrote them down, adding up the total at the end of the column. In a separate column, I wrote out my expected expenses based on my new living arrangement. I also listed my top four priorities as expenses in the budget.

Here’s a sample of what I was spending prior to moving back in with my parents.

Expense
Rent – $500
Car – $350
Insurance – $100
Electric – $100
Internet – $45
Cell Phone – $50
Gas – $160
Food – $200
Entertainment – $200
Credit Cards – $100
Misc. – $100

All for a grand total of $1905.

Step # 2 – Adding up income

At this point in my life, income was pretty simple. I only had the one income coming from work. I hadn’t started freelance writing – more’s the pity – and I wasn’t doing anything else to earn income. To be honest, I was never very good at working two jobs simultaneously, so I was hoping to avoid that if I could. So, when I figured out my monthly income and compared it with my expenses prior to moving, I was spending about $300-400 more a month than I was earning.

My net salary was about $1540 per month.

Interestingly, it wasn’t going to bills per se. I was within my means on rent and utilities. But, I had too much car for what I could afford, I ate out AND bought groceries that I was throwing away because it was going bad, and I was generally just blowing money on nonessential stuff.

Step # 3 – Making adjustments

At this point it was pretty clear that I needed to make some adjustments, or I was never going to get out of debt. So, I re-evaluated all of my bills and looked for cheaper options. Obviously my new living arrangement would allow me to cut the rent and utilities down a bit. While living with my parents, I paid $150 a month for rent, $60 for phone and internet (no cable modem in their area), and $50 towards the electric bill.

Where I was originally paying $645 for those bills, I was able to save $385 – putting me $20 below income. Yay!

The next big item to be cut was the entertainment budget. I cut that down to about $75 a month. For the little stuff, I lowered my cell phone plan and took advantage of a corporate discount, knocking my bill down to $35. That saved me another $140 in the budget, putting me at $160 below income.

Luck was on my side at this point, because I got a raise shortly after moving back in with my parents. My net salary increased to $1923 a month. My expenses had been cut to $1380 a month. That left me with a surplus of $543 a month. All things considered, I felt pretty good about the changes I’d made and didn’t feel like I was suffocating myself, financially speaking. So, my new budget looked a little something like this:

Expenses
Rent – $150
Car – $350
Insurance – $100
Electric – $50
Phone/Internet – $60
Cell Phone – $35
Gas – $160
Food – $200
Entertainment- $75
Misc. – $100
Emergency Fund – $271.50
Retirement Accounts – $135.75
Credit Cards – $167.88
Moving Out – $67.87
Total – $1923

Step # 4 – Review monthly

As you can see, I pretty much had this figured out to the last penny. Unfortunately, I wasn’t always so disciplined that I followed this every month. There were months that the credit card debt only got the original $100 I was paying while the moving out section got nothing at all. I had overspent in my entertainment budget. In fact, that was the category I consistently went over in the most.

Each month I would revisit the budget to see where my “money leaks” were, and I’d do my best to make sure I corrected the problem for the following month. But, overall this budget suited my purposes. When I switched jobs, and got a higher salary, I adjusted the budget again, keeping the same pattern on my goals.

Step # 5 – Don’t beat yourself up

The first month I totally blew this out of the water. I bombed it because I hadn’t changed my spending habits. I was new to the budget, but it didn’t matter to me, I was beating myself up profusely. One day I was talking to a coworker about it and telling her what an idiot I was. She stopped me and asked me if anyone had been hurt by my learning curve. I told her no. She said not to worry about it. I was sweating the little stuff. The important thing is that I had made a budget and I KNEW where I was struggling. She told me that put me about three steps ahead of the rest of the population who didn’t budget.

It’s great advice. When we start anything new, there is a learning curve. Don’t beat yourself up while you’re in the learning curve because it will discourage you…that negative self-talk is perhaps the worst critic we have. Ignore it and press on. That’s what I decided to do. By the end of the second month I’d seen drastic improvement. By the end of the third month, I was getting the hang of things. By the end of the six month, I had it down.

Wanna discuss it beyond the comments? Head over to The Open Thread!

Related posts:

1. How not to overspend on a Credit Card
2. Tom’s first post – Getting Started
3. How I Got Out of Debt: Part I
4. Subscriber Swap Saturday: No Debt Plan
5. How I Got Out of Debt: Part III