The Baby Step Budget is based on our Baby Step Goals. Hopefully you’ve come up with your first baby step goal suggested in my previous post Life Skill: Budgeting – Why We Need It. My first goal was to stay out of the negative, or rather keep the checking account in the black. I believe that’s as bad as it can get regarding a budget, outside of having absolutely no income to speak of at all. But I’m assuming that since you’re reading this, you probably have some semblance of an income, as no income = no internet. Even if you’re begging for change on a corner and have made your way to the library for free computer and internet access, everything I’m about to tell you still applies and will help you.
*Reminder: These goals and this budget are based on the assumption that you are truly struggling to get by. The information I am providing is based off of my own personal experiences and what worked for me. The basics here can help anyone, so for those looking for more advanced financial planning, I apologize, but still encourage you to review this. You may be surprised and/or find that you can easily pass this along to someone needing this kind of information.
The Baby Step Goals
AKA Baby Goals. Don’t get offended. Think of cute, squishy, little baby faces that will one day grow into beautiful, intelligent beings. These are the baby steps I took that worked for me. They helped me breathe a little easier once I reached them.
1. Stay out of the negative
2. Pay priority expenses on time and in full
3. Increase spending amount of flexible expenses
4. Save $100 a month
5. Pay off smallest creditor
We’ll leave it at that for now. These goals may not apply to you (maybe you’re a little ahead of the game), but how to budget and some of the suggestions I have regarding a budget absolutely will, so stick with us.
Now, don’t worry too much if you don’t totally understand what each goal means. It’ll all make sense shortly. Besides, regardless of what your budgeting goal is, the only way you’re going to reach it is by learning HOW to budget. The goals are to remind us what we’re working towards – to motivate us to keep going, especially when we want to splurge or get too overwhelmed by financial insecurity. The most important thing is to learn this skill and utilize it. So let’s get started!
How to Make a Budget
What you need:
- Lined paper (or any paper really)
- Writing utensil
- Bank statements, bills, receipts (anything and everything that will help you figure out your income and expenses)
I always start off writing my budget out on paper. If you know how to do spreadsheets or have already downloaded some budgeting software, you can enter this information there. If you don’t know anything about that stuff, we’ll get into budgeting tools later because they are useful, but we’ll just stick with pen and paper for now.
Once you’ve gathered everything you need to make your budget, it’s time to start writing.
We’re going to start with the money you have RIGHT NOW. Any cash that you have, money in the bank, whatever you have to use to pay any type of expense right this second – add it all up. Write that number at the top of your page and label it “Income.” If you’re getting paid within the next day or two and know exactly how much you’ll be getting, you can include that, otherwise do not add it to your budget yet. In fact, we’re going to make this a rule:
Rule # 1 – Don’t Spend What You Don’t Have
I know. Rules suck. But we need them. This particular one is really a new way of living. It helps to focus on what we actually have to spend which helps us figure out how to spend it more usefully. If you learn to accept this new way of living, you will eventually allow yourself to worry less. That is to say, you will allow yourself to not be bothered by anything else in your budget other than what you can actually take care of. It’s like living one day at a time (only focusing on today, not worrying about tomorrow), except it’s one dollar at a time (only focusing on how to use what you have right now wisely, not worrying about anything outside of that).
So again, add up all the income you have right now, write it at the top of your page and label it “Income.” With Rule 1 put into full effect, you may NOT add anything to your “Income” line until you have actually received it.
This is how I do it:
We usually get paid on the 1st and the 15th. Our first paycheck of the month is always the same, and since the 1st is about to arrive I’m going to show you how I write it out. Our first of the month income is actually two separate checks directly deposited into our account, so I need to add those to my current checking account balance and then write the total down on paper.
$747.50 (Current Balance) + $3,000 (Check/Deposit #1) + $479 (Check/Deposit #2)
On the top of my page I write:
Income – $4,226.50
Expenses are what you, unfortunately, have to spend your money on (rent, insurance, loans, phone bill, fuel, utilities, etc). On your piece of paper, write down “Expenses” underneath “Income,” skipping a line. Now, each line underneath “Expenses” you’re going to write down all of the expenses that need to get paid before you receive your next income.
Since we get paid on the 1st and the 15th our first month’s income is used to pay off all the bills due between the 1st and the 15th. When our second month’s income comes in we use it to pay off the bills due between the 16th and the last day of the month. Also, we split rent in half between each payday (our rent total is $1,495/mo), which is why our current balance was already at $747.50 as it’s due on the 1st. We budgeted our second paycheck from last month to include that money for rent to be available to put towards this months rent.
Depending on how you get paid, that’s probably how you want to split your rent (i.e. if you get paid weekly, that’s about 4 times a month, you’ll want to divide your rent by 4). Every time you get paid you want to set that much aside for rent. Before the example, let me quickly add that this works for any large bills.
$1,495 (total monthly rent) / 4 (number of paydays in a month) = $373.75 (amount to set aside each paycheck for rent)
If you need help figuring any of this out, please contact me, I’ve got your back!
I also write down any due dates I’m aware of in () next to the expense name. Whether it’s taken out directly from my account or not, it helps me stay on top of due dates as well as not freak out when I check my balance.
Let me show you what my budget looks like, only focusing on the money I have and using it on what’s due before next payday:
Income – $4,226.50
Rent (1st) – $747.50
Car 1 (1st) – $302.82
Phone (5th) – $182.22
Electricity (12th) – $34.59
Propane (1st) – $90.00
Fuel – $300.00
Groceries – $300.00
Cigs – $300.00
Medical (1st) – $334.08
School loan (6th) – $670
= $3,261.21 (After adding everything under “Expenses”)
My total expenses for the 1st-15th = $3,261.21. Now it’s time to subtract my total expenses from my total income:
$4,226.50 (total income for the 1st-15th) – $3,261.21 (total expenses for the 1st-15th)
Let’s stop here for a minute. If you’ve gotten this far, guess what? You’ve got the budgeting basics down! The next time you get paid you do exactly the same thing you did here:
- Add the amount of money you get to your “Income” line
- Write down the name and amount of each expense that will be due before the next payday under “Expenses”
- Add those up to get your total expenses
- Subtract your total expenses from your total income for the time period.
Now you might not feel so cheerful if your total expenses were more than your total income. So we’re going to back track here a bit as this refers to our first Baby Goal – Staying out of the negative.
What if Expenses are MORE than Income?
If all the work you just did on your budget results in a negative number, well, you already have it all written down. To be able to show you what to do about it, let me change my budget so that it reflects a negative result as well. To do this, I’m going to subtract $1,200 from my original “Income” line before I subtracted my total expenses:
$4,226.50 – $1,200 = $3,026.50 (new total income)
Income – $3,026.50 (This is how I would write it at the top of my page)
So, if $3,026.50 is my new total income and everything under “Expenses” stays exactly the same, when I subtract my total expenses from my new total income it would look like this:
$3,026.50 (new total income) – $3,261.21 (total expenses) = – $234.71
Here is where I freak out, pull at my hair, curse at the top of my lungs, etc. Then I take a deep breath and look at my budget again. Now your turn to take a deep breath. Ready to keep going? Okay…
**This is where I remind you of Baby Goal 1 – Staying out of the negative. This is your mission! You are absolutely going to REFUSE to overspend and allow yourself to be in the negative!**
So now what? We’re going to have to prioritize.
This is the part where I come up with my “priority expenses” mentioned in Baby Goal 2. Of course we’re always trying to attempt to pay off ALL our expenses, but right now I haven’t even managed to reach my first Baby Goal of staying out of the negative. So my main focus (OUR main focus) for the time being is still Baby Goal 1. However, these “priority expenses” we create now will be helpful for when we’re ready to take on Baby Goal 2. So let’s get to prioritizing!
Priorities are personal. How I chose to prioritize may not be the same way you would prioritize, but I’m going to walk you through what I would do. I’m not saying my way is the only way, but before you do make any decisions, you may want to see the how and why of my suggestions here first.
So looking at my budget I’m going to go down the entire list before making any final decisions. As I look over all of my expenses I notice that there are bills that are set in stone, so to speak. There’s an exact amount and due date.
In my budget, the bills are: Rent, Car 1, Phone, Electricity, Propane, Medical, and School Loan.
I also notice that I have these other expenses that I need to budget for, but aren’t necessarily set in stone. These are the “flexible expenses” mentioned in Baby Goal 3. Their amount is estimated and they don’t have a due date.
The flexible expenses in my budget are: Fuel, Groceries, and Cigs.
Right off the bat, seeing that there are flexible expenses, we’re going to start there:
Fuel – I think I could get away with shaving off $50 from this expense and add it to my income. As long as I limit my driving by walking when I can, ask for rides, and save money on gas by using gas points from rewards cards and/or only going to the least expensive station to fill up, I should be okay.
Groceries – I’m pretty creative when it comes to saving money on food (coupons, deals, food bank if necessary), so I can get away with taking $100 from this category. My family and I may have to eat lots of spaghetti and leftovers, but it’ll only be temporary.
Cigs – No one is ready to quit, but for the sake of staying out of the negative we’re willing to cut back. I think we can agree to smoke the least expensive brand, maybe even find some coupons, and get one less carton than we usually do. That’s another $50 to add to our income.
So now I’m going to apply these changes to my budget by subtracting $50 from my “Fuel” line, $100 from my “Groceries” line and $50 from my “Cigs” line. Now those categories look like this:
Fuel – $250
Groceries – $200
Cigs – $250
After applying the changes to my budget, I have to recalculate my total expenses by subtracting the $200 I just freed up.
$3,261.21 (original total expenses) – $200 (freed up) = $3,061.21 (new total expenses)
*OR I could add up all my expenses again with the newly adjusted numbers. The new total expenses would still = $3,061.21. Doing it this way takes a bit longer, but it would be a good way to check my work.
Now we subtract our new total expenses from our total income:
$3,026.50 (total income) – $3,061.21 (new total expenses) = -$34.71
Not too shabby! Now I could try to make some more room in one of the flexible expenses, but I really don’t want to push my luck with those categories. Some people may think I’m crazy for not automatically deducting it from my “Cigs” line. Well, for one, I want to make an example for having to choose between bills. And two, as easy as it sounds to cut another carton out between 3 smokers, believe me it wouldn’t be. We’d probably kill each other. If you’re able to cut something like that out, by all means, go for it. More power to you (I really mean it!). Just keep in mind, your sanity and comfort are priorities as well. It all goes back to priorities being a personal thing. So enough about that…
We still have $34.71 we need to free up. It’s time to take a look at the bills:
Rent – I’ll never budge on rent. I refuse to ever be homeless again. Cutting back on rent, even a smidgen, is one step too close for me towards homelessness. Even if you’ve never been homeless before you don’t want to mess with rent. We’re going to make a pact, right here and now. We will NEVER skimp on our rent. We will always find a way to pay for it! Blood buddies for life!
Car 1 – Being that this is something that could eventually be taken away if I don’t keep up with, I’m going to pay this one in full as well. I need it for important things, like getting to work. If I can’t get to work I’ll lose my job and my income. Transportation shouldn’t be tampered with too much. It may seem contradictory since I cut back on my fuel I’ll use for my car, but somehow there always seems to be a way of getting the gas I need to get around (like finding spare change randomly).
Phone – Aha! Here’s one that if I at least pay SOMETHING I get to keep my service. Even if I get to a point where they cut off my service, it won’t be terribly damaging to my credit, nor will it be as difficult to get back (versus a repossessed car, for instance).
Electricity – This one’s tempting to not pay at all because it’s only a few cents short of what needs to get freed up, and who cares about being negative by a measly 12 cents? I CARE! It’s so low a payment there’s no excuse not to pay it, especially if I’m still in the negative. If a negative balance shows up in my account, I’m going to get charged a fee from the bank making my balance even more negative. I intend to reach my first Baby Goal, so I’m paying this one. Also, way too many aspects of daily living hinge on this one and again, it’s a low payment.
Propane – This one also effects way too many aspects of daily living. This one’s getting paid.
Medical – This refers to health insurance only. It’s getting paid. I’m of no use to anyone if I can’t use what little benefits I get from having health insurance, especially if I get sick. If I get sick and can’t get taken care of properly I’ll miss too much work, potentially losing my job and income.
School Loan – This one is ridiculous – I freaking hate it. No, I LOATHE it. I’ll probably never get it paid off in my lifetime, and even though it effects my credit, I already received my education – so it can’t be taken away. This one may get the axe.
So now I’ve got 2 options. I’m either going to skimp on my phone bill or my school loan. It’s a good toss-up, but I’m going to pay the school loan in full and skimp on my phone bill. Why? I look it at it like this:
If I’m able to put money towards a HUGE debt versus a bill, I’m going to pay the debt. The interest on the school loan plus a late fee will hurt more in the long run. If I get so far behind on my phone bill that it gets cut off – even sent to collections, it’ll hurt my credit a bit, but eventually there’s a stopping point as to what they can charge me. Also, I intend to fit the amount I can’t pay on the phone now into my budget once I get more money. The late fee will be much less compared to the late fee I’d get if I cut back on the school loan.
Now that I’ve made that decision, I’ll make the adjustments to the “Phone” line :
$182.22 (original “Phone” line amount) – $34.71 (amount that needs to be freed up)
= $147.51 (new “Phone” line amount that needs to be changed in the budget)
After the new “Phone” line amount has been changed and I recalculate my budget like I did when I changed my flexible expenses:
My total expenses now = $3,026.61 and my total income = $3,026.61. Time to subtract my total expenses from my total income to see where I’m at:
$3,026.61 (total income) – $3,026.61 (total expenses) = $0
My results have me breaking even, meaning I stayed out of the negative! WOOT WOOT! Baby Goal 1: CHECK! (Happy Dance commences now!)
If you apply these same ideas to your budget you should also be able to stay out of the negative. As you continue to budget and stay out of the negative, you’ll soon be able to have all your bills paid in full and on time. Not too long after you’ve mastered these two objectives (Baby Goals 1 & 2), you won’t just be breaking even anymore. When that happens you need to start implementing another rule:
Rule #2 – Assign Every Dollar
It’s pretty simple. You’ve gotten to the point where everything that NEEDS to get paid is paid, and you’ve still got some money to spend. You can add that extra money to your flexible expenses (Baby Goal 3) to make life a little more comfortable, start putting money away to save (Baby Goal 4), and/or start paying off the credit card with the least amount of debt (Baby Goal 5). If you don’t assign it, you can’t spend it wisely, so be sure to put it somewhere in your budget (if it’s an expense not already under “Expenses” you need to add it there to be able to assign the money to be spent).
There’s only one more rule you need to worry about right now:
Rule #3 – Record Everything
Every time you spend money, take out your budget (yes, carry it with you ALWAYS) and subtract it from the expense category it belongs to. This will help you keep track of your spending and ensure you will stick to your budget. Outside of keeping your written budget and a writing utensil on you at all times, there are other methods of keeping a record and staying on track. There’s a fair amount of budgeting tool options to choose from, but I’ll cover that topic in my next post
Please contact me if you need help with your budget or have any questions, we’ll figure it out together!
**Give yourself a big pat on the back for getting through this toughie. Money problems suck, but they’re even more miserable when you continue to ignore them. I really hope this helped. Stay strong out there!