How to Set Up a Living Budget

How to Set Up a Living Budget
••• budget, payment allocation image by Kalani from

Contrary to what you may be thinking, the point of a budget is not to immediately squirrel away every single penny that comes into your possession. The main point of a budget is to make sure of two things: that your basic needs are taken care of each month; and that you are completely aware of how much cash you have throughout the month. When you figure out what type of spender you are, you can create a working budget that helps you meet your financial goals.

Assess Your Spending Habits

First you have to figure out what kind of spender you are: You may be the frugal type or the extravagant type. Being frugal means that you bargain hunt, pass up wild spending sprees and generally keep a fairly tight rein on your cash. You need a budget just as much as an extravagant spender, because you may be skimping on the pleasures of life when you could afford to live much more pleasantly. The good news, though, is that your inherent thriftiness will probably make it easier to stick to your budget and build your savings.

The extravagant type often finds it hard to live on a budget. If you don't keep track of your expenditures and rarely look at the price of purchases, you may have extra work to do when creating a budget.

Determine Your Gross Monthly Income

What you'll have to do is carefully figure out (as exactly as possible) how much money you have rolling in each month. To do this, think of every single way you make money. Here's a list of possibilities to think about:

Here's what professionals say you should focus on:

Determine Your Basic Needs Costs

Here's a list of suggestions of things that you simply must spend money on every month (not just the things you really want, but the things that you are legally obliged to pay). As you read, try to calculate as precisely as possible how much you spend monthly on each one:

Feel free to include anything you else you think should be on the list. But the point is to budget for things for which you definitely have to put money aside.

Once you have the list, add up all the numbers, and then divide by four.

The rule: This is the amount that you must put aside from your paycheck EACH WEEK. If you have a checking account, a good strategy is to open a separate, "secondary" checking account (ask your bank). Then you can transfer the exact amount into that account as soon as you get your paycheck. When you pay the bills, you just write the checks from that account and you know you'll always have sufficient funds.

Allocate Funds for Your Nest Egg And "Wants" Costs

Once you have your money set aside for the basic needs, the rest of the money is your "spending money." Obviously, there's no way to fully detail all the things you'll have to spend money on, but think of your costs for entertainment, clothes, a new stereo, cell phone, dinners out, vacations and so on. Because each week is different, it's hard to budget your spending money to the cent. But what you can do is keep track (preferably on paper) of your spending so that you pace yourself until the next payday.

Life is unpredictable and if you do lose your job, you'll need some money until you get back on your feet. Hence, you may want to make "savings" a part of your "needs." If so, just add it in (after you pay the bills, you can transfer the remainder into an actual savings account)--and we commend you for your diligence. The best strategy is to set up an actual savings account (separate from your checking account) with your bank. Then, each week, as soon as you get your paycheck, transfer however much you'd like right into that account. Some banks allow you to do this right over the web. And don't forget, you'll get interest on your savings.

Stick to Your Budget

The most important rule to stick with: If you don't have it, you can't spend it. This applies to all aspects of your budget. Most importantly: Always transfer your basic needs funds to the secondary checking account immediately after you're paid. Don't adopt the attitude that you'll do it at the end of week. If it's in a separate account, it'll be much easier to avoid spending it. Procrastination is a surefire way to kill your budget.

Cash: A good strategy is to carry only what you think you'll need.

Credit cards: Get out of the habit of using credit cards. They're good to have for emergencies and major purchases, but if you constantly charge it, you'll wind up spending double what you would have because the interest will pile up. A good way to manage your credit card bill is to only use one credit card and cut up your others.