Starting a Budget

In communicating with one particular reader, I discussed the digital envelope system in further detail. One thing that came up during our conversation was how to begin, since all values will theoretically begin at zero. For instance, if July has a six month insurance premium due, and it's already halfway through May, how do you begin a budget when some of life's really big expenses are staring you in the face?

Putting off working off a budget isn't really a good answer, because procrastination will reign, and there will always be a "good reason" to put it off another month. So, if the only answer is acting immediately, what is the best way to go about it?

Here are the steps that I went through when I was beginning the process, and hopefully they can help you as well...

1. Factor your expenses. Set aside your income for a minute. What you make is actually less important than what you spend. Begin by writing down every expense that you have. Use budget forms to help spur your thoughts, because you want to have a category for every expenditure. (Microsoft offers this one, and has a lot of good categories to help you form a budget. As well, Dave Ramsey offers this one as a quick budget tool.)
2. Fund your envelopes. Hopefully, you aren't starting at zero, waiting on your paycheck to hit the bank. Balance your checkbook and get to a number. If you don't have enough money to get a month ahead, work on getting up to speed. Perhaps you can cut expenses in some area for a few months while you get your system built up. Perhaps you can work an extra job, or have a garage sale. The key is that you want to operate a little ahead of your bills. If you have $1000 in rent, for example, by the 3rd week of the month, you should plan to have $1000 in the bank. Ideally, you will expand to having a month's expenses (or more)in the bank as surplus, but if you are reading this blog, I'm betting that you are living paycheck to paycheck, or dangerously close to that. The important thing is to have whatever current cash you have injected into your envelope system to give it a head start.
3. Figure in your income. Now that you have a list of expenses, you should be able to see what you require in the way of income. Hopefully, your current income is higher than your expenses. If it isn't, you have two basic options: you can either raise your income, decrease your expenses. Putting an expense on a credit card will seriously damage any progress you make. Assuming that your income is higher than your expenses, you can take the difference and apply it to your debt reduction plan. It is important for you to have an emergency fund - some money set aside that you don't spend on anything but emergencies, so that you don't end up putting it back on a credit card, losing the ground you'd already covered. Some people go with $1,000 for their emergency fund, some say a month's expenses worth, and some say 3-6 months worth of expenses. For now, I've gone with the $1,000, tucked safely away in a free checking account in a bank that I don't use for my budgeting or debt reduction account.

Once you get your budget worked out, your envelopes funded, and your emergency fund in place, you can begin the process of getting getting out of debt. Whenever these three items weren't in place, I found it very hard to get any traction on reducing my debt, but the process seems to go much smoother when all three of these are up-to-date and taken care of.