Below Your Means Basics: Getting Your Budget Done


Getting started with a basic budget

If you’ve been keeping up with your Below Your Means Basics series this week, you’ve now thought through your goals and why you’re building a budget.  (If you’re just picking up the thread, you can find the first post here).  You’ve started having sane conversations with your spouse about what you value and how much things are worth to you.  You know you want to take more control of your finances.  What do you actually do about it?

A Note About Tools

We’re not going to get into the mechanics here of how to implement your system on any given piece of software.  You need to be honest with yourself about what will work for you. If you are intimidated by personal financial software, get an printing calculator and a notepad.  I say “printing calculator” and not “calculator” because you’ll REALLY want to have that record of what you entered when the math doesn’t add up.  If you do go low-tech, the envelope method seems to be pretty popular.  All you need to do is get an envelope for each category in your budget and put the cash you have to spend each week or month in there, after paying your bills by check.  You take the cash out of the appropriate envelope when you need to make a purchase.  When you’re out of cash, you stop spending.

If you go the software route, there are lots of options. Computer tools are a terrific way to track your spending and, with a little bit of patience and work, you can pretty easily manage a budget with one.  For fairly simple scenarios without a lot of investments to track, is a great free solution.  If you are nervous about using a cloud resource, we personally use Quicken Deluxe 2011 .  You may also already have a basic spreadsheet program on your home computer, such as Microsoft Excel 2010 .  Additionally, there are free spreadsheet tools such as Google Docs Spreadsheets.

Getting Your Budget Done

Below is a step-by-step description of getting your budget implemented.  Many sites recommend that you have 3 months of tracking information in place before you start drawing up your budget.  We disagree.  If you have thought through what you value and what you are able and willing to control, there is no reason why you can’t start now.  Just remember Principle 3, that your budget is a living, changing document that you will revisit frequently.


Create your list of spending categories.   Don’t edit too much as you draw up the list, just write down the categories of things you spend money on.  Once you have the list done, take a look at the tips below, and review the categories to see if you missed anything.

  • If you’re using a software tracking tool, they have a list you can use to start from but don’t take it as gospel.  Note:  Don’t try to manage your list in your software product just yet. You’ll be making so many changes as you go that it will drive you bonkers to implement them all in the tool.
  • Include savings goals and debt payment goals.  We’ll talk about saving more next week, but for now consider that you want to save for both emergencies and retirement, at a minimum.
  • Do NOT confuse “making a credit card payment” with “spending”.  What you spend each month is what you spend, whether you put it on a credit card, wrote a check, used your debit card, or paid cash. Making a credit card payment is divided into two pieces – paying interest and paying off principal.
  • DO make sure you include a monthly amount for paying down the principal on any credit card debt or other non-auto, non-mortgage consumer debt you may be carrying.  Call this something like “debt reduction.”

Here’s a sample list:

  • Auto – car insurance, car maintenance and gas
  • Babysitting – really any childcare services
  • Charity – charitable donations
  • Clothing – family clothing for the kids.  each adult is responsible for their own clothing
  • Dining and Entertainment – going out and having fun
  • Enrichment – gym memberships, classes (including after school activities for the kids), and the like
  • Groceries, Toiletries & Misc – daily consumables like food, toilet paper, cleaning products, over the counter medicine, etc.
  • Housewares – bedding, glassware, any other purchase for the home
  • Housing – mortgage interest, mortgage fees, utilities, and repairs
  • Medical – medical insurance and medical bills
  • Services – any kind of professional services, from housekeeping to haircuts
  • Vacation – saving up for vacation
  • Savings – paying down credit card balances, building up emergency funds, retirement savings, etc.


Group your categories into areas of control.  Obviously the simpler and more personal you can make this, the better.  There are things you have to pay that are hard to change (fixed expenses), things you have to pay that are easy to change (variable expenses), and things you like to spend money on (discretionary expenses). Those are the 3 easiest groupings to manage, and you may find that your category list changes once you take this approach.  For example, using the list above:

  • Savings Goals
  • Fixed Expenses: Mortgage Principal, Mortgage Interest, Mortgage Fees, Car Principal, Car Interest, Medical Insurance, Auto Insurance
  • Variable Expenses: Groceries & Toiletries, Car Maintenance, Gas, Utilities, Enrichment, Housewares, Services, Medical Bills, Babysitting, Utilities
  • Discretionary Expenses: Dining and Entertainment, Charity, Vacation

Now that you have these organized you can finish up with your budget categories.  Again, group along the lines of what you value and where you can make changes.  Within the “fixed expenses” category, pretty much all of your insurance costs are going to be hard to control on a month-to-month basis.  So group them into a single “Insurance” category, add up your total insurance payments, and you now know your monthly budget for insurance.  Within the “variable expenses” category, you may decide that housewares, groceries and toiletries all belong in the same pile.  You may also not need child care services outside of discretionary expenses, so you can lump that in with “Dining and Entertainment.”

Play around with a few different category groups as you go.  Even if you are handling your budget in software packages, you may want to do some of this on paper while you are settling into a groove.


Once you have a set of categories and they’re organized, it’s time to budget.  Start by taking a look at your existing spending if you have the records for it, and see where your money is going.  Take note of your fixed expenses, as they will be tough to move.  Then, take a look at your savings goals, and set some dollar amounts for the various types of savings.  Once you have those numbers in place, you are ready to tackle your variable and discretionary expenses.

Income – Fixed Expenses – Savings Goals = Total Variable and Discretionary Spending

You can get lost here pretty easily because there is a good chance that you are currently living at or above your means, and fitting all your spending into your income could be painful.  Don’t give up. Remember to think about what you value and what certain conveniences and luxuries are worth to you.  The value equation is all about understanding the true cost and benefits of your spending.  Worth is a bit more esoteric, but it helps to realize that while a purchase might be a great value, it still isn’t worth it to you, right now.

The detail you put into budgeting your variable spending is entirely up to you.  Some people prefer the method of figuring out their fixed expenses and their savings goals, and then letting the chips fall where they may.  Other people want to be more deliberate about it, and make sure they have money set aside for important but not urgent things, like our family’s Enrichment budget.  That reminds us to cut back on things like groceries and housewares where we can in order to make room for positive experiences for ourselves and our children.  But again, it all depends on your personal situation and personal goals.

One thing you must absolutely do within your budget is make room for the unexpected. If at all possible, do this in addition to your savings goals, or you will find that you continue to run up your credit cards as the unexpected strikes.  So, your budget formula should really look like this:

Income – Fixed Expenses – Savings Goals = Total Variable and Discretionary Spending + Slack

After you’ve completed all this, you’re ready for the hard work of cutting back on your spending to fit within your budget.  If you’re not on the verge of financial ruin, be gentle with yourself and take a few months to get into the swing of things.

Software Note: Some software programs will have some extra features that make it a bit more complicated to track, say, a mortgage payment.  The software will want you to enter a value for your home, the size of the mortgage, and break up your mortgage payment into principal, interest, and any fees.  Stick with those features as they will eventually give you good information.  Otherwise, simpler is better.

Special Considerations for Spouses

If you’re in a relationship that involves joint finances, decide how to handle splitting up your money.  We strongly recommend the yours/mine/ours approach, which involves each spouse contributing to a household budget and retaining a portion of the budget for their own spending.  How far you take this has everything to do with how you manage decisions in your relationship.  In our research we’ve found four common methods:

  1. It’s all our money.  We don’t recommend this approach, but sometimes things are tight enough that it’s the only way to go.  But, if you drill into the budgets of people who claim they follow this strategy, often times you’ll find that they actually use method #2.
  2. Each spouse gets an allowance.  In this method, all the money goes into a common pool except an allowance for each spouse to spend on whatever they like.  Allowances are not necessarily equal depending on what expenses are included in the allowance.  If this is just plain ‘fun money’ than equal allowances are the best option.  If each spouse is responsible for their own gas, car maintenance, clothing, etc., then a realistic couple will dispassionately take those differences into consideration (for example, the couple where one partner spends more time driving than the other).
  3. Each spouse contributes equally to a household budget and keeps the rest of their income.  In this method, the household budget is split evenly.  This is a common approach for 2-career couples, especially if their incomes are similar or they are libertarians.
  4. Each spouse contributes to the household budget in proportion with their income.  In this method, the household budget is divided based on the spouse’s ability to contribute.  It has the benefit of feeling more fair and preventing disagreements about spending based on the difference in each partner’s perception of what is affordable.

Talk through these options and experiment to find out what is best for you.

Tomorrow we wrap up our Budget Basics with common pitfalls to avoid.

Photo Credit: Alan Cleaver

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