Recently several people have asked me how I create my household budget each paycheck. So, here is my household budget plan for a month. I learned this from my friend Leslie. She taught me how to make a household budget and stick to it when I did not know what the heck I was doing.
Getting Started
Gather all your bills into one spot. You can use a shoebox, folders, files or any other organization system that you find useful. I use the Filewise file folder system to help me keep my paperwork organized.
You will also need paper and pencil/pen or some spreadsheet software to help you create your budget. I use Excel but paper and pencil will work just fine.
Set aside one hour a paycheck to go through all your bills and plan your budget.
What bills do you have?
Next, write down all your bills and how much you owe for that month. Here is a list of my bills that I will use:
- Rent- $400
- Electric- $136
- House Phone- $75
- Cell phone- $50
- Sears Credit Card- $30
- Credit Card #2- $25
- Credit Card #3- $30
- Medical- $122
Let's say you did not get a big paycheck, your car broke down, you have a garnishment you weren't expecting or something else happened that you didn't plan… What do you need to survive? You need food but you do not need McDonald's, Stouffer's Lasagna or Pepsi. Plan to make your food budget for cooking your own meals, making your coffee and taking your own snack.
- Gas money- $30 (I could walk to work if I needed. I added this to give you an idea)
- Food- $200
- Kid's Lunches- (My kids are homeschooled so I do not have this expense either)
On your pad of paper, write down how much you are making. I guess low for my average paycheck. We will guess my paycheck at $800. It may be higher or lower, but this is the average.
Now, write down and subtract the things you need to survive. My pad will look like this
Amount I have/ Item I am adding or subtracting /Amt left
- $800 Paycheck 800
- 200 Food 600
- 30 Gas 570
Now that I now I am not going to starve to death before my next payday and I can make it to work to earn more money, I go through my bills and figure out what is the most important bills to pay. Things like rent and electricity are paid first. The cell phone is the last thing on the list. I don't NEED a cell phone. I do NEED a house to live in though… and electricity is necessary as well. Here are my bills in order of necessity:
- Rent- $400
- Electric- 150
- House Phone (with internet)- $70
- Sears Credit Card- $30
- Credit Card #2- $30
- Credit Card #3- $30
- Cell phone- $50
- Medical- $122
You may not be able to do this but this is what I prefer to do.
Since I have 2 paychecks a month, I pay half a bill on one paycheck and the other half on the next. One paycheck bills will look like this:
570 What I have to pay bills
- 200 Rent 370
- 75 Electric 295
- 35 H. Phone 260
- 15 Sears 245
- 15 CC #2 215
- 15 CC #3 200
- 25 Cell Phone 175 (put in an envelope and set aside until next paycheck)
- 50 Medical 125 (leaving 72 as my balance)
As much as I would love to be able to set aside what experts say I should, I cannot always do that. Once I know that my bills are paid, I will make it to work and I will not go hungry, then I can plan to set aside some money for savings. The minimum I like to set aside is $50 a paycheck.
At $800 a paycheck, I would really like to set aside $80, but I do not think I want to do that so I plan on $75. That is $150 a month in savings. Now if you need the money (and I mean NEED it) you can take it out and use it. If not, let it sit there and collect interest for a while.
- 125 Left after bills
- 75 Goes into savings! 105
SNOWBALL your bills!
So now, we have $105 to spend wisely. Assuming we do not need anything else, like printer ink, new shoes, hair cuts, an oil change, etc then we start snowballing the bills so we can get rid of them.
Once you have paid all the debts the MINIMUM amount due for the month…
The idea behind this is that you find the smallest amount owed on your debts and pay all the extra money on that bill first to get it paid off. Once it is paid off, start adding the amount you owed on it and the extra money onto the next smallest debt until it is paid off and so on.
In my example, I have $72 left on my medical bill. I pay it out of my $105 left over and BAM! I have a bill paid off and I have $33 to add to my next lowest bill or use as play money. I usually try to keep extra out for things like soap (which I buy in bulk and it lasts for MONTHS), casino night with friends, eating out, new clothes or something else fun so I don't feel as poor as I am.
Snowball argument
Some people argue that you should pay off the higher interest rate loans and credit cards before you pay off your smaller debts. I argue that I would rather have 2 higher interest debts that I can pay a lot on rather than having 27 debts (BTDT!) nickel and diming my paycheck away every single month. I have tried both ways and I prefer paying off the debt with a smaller balance first. If I pay off that $100 medical debt this month, I can add that $100 to my $3,000 medical bill with 10% interest next month when I have one less bill to worry about… instead of paying $10 on that smaller bill for the next 10 months.
I did try snowballing the higher interest debts first for about a year before I finally switched to snowballing the debts starting with the smallest balance. In one year, we got rid of TWO bills… each under $100 to start… when snowballing the higher interest. Since we switched, we have managed to knock our debt down from over $50,000 to about $5,000 in around six years. The first year of snowballing starting with the smaller debts first, we went from 27 debts down to 18 debts. I think that says more to me than what any expert can say…
Fewer bills helps me out more on those months my paychecks are short.
