We have previously shared how to get your budget set for the “high level” view. So today, we are going to talk about How to Set an Effective and Successful Budget so that you can run your finances effectively and efficiently, while at the same time setting yourself up for fail-proof success and a whole life change.
This is honestly our own personal way of doing this. We developed this on our own after 3.5 years of failing to follow other plans. It was like we kept setting ourselves up for failure each time. We knew that we needed to make gradual changes in order to turn this into a life-style and in order to accomplish our financial goals.
If you have been reading our site and our personal financial story for long, then you will know that we have been successful, first by the Grace of God, and secondly because we took baby steps and things started happening in the positive and today we have been debt-free for nearly 3-years and maintaining the same frugal lifestyle – because what we did set us up for a future of being better financial stewards.
It wasn’t a financial crash diet, it wasn’t intended to be temporary to get us out of a rut (even though that was part of the goal), it wasn’t to help us reach that goal of becoming debt-free and then life would go back to normal….. we wanted the frugal lifestyle to be normal no matter if we got out of our $100K of consumer debt or not.
Think of it as a “healthy diet.” You know the ones where you lose the weight in a healthy gradual way. Well, those are the same people that can maintain their weight loss much easier and much more naturally than those that did crash diets.
So are you ready to find out how to set a budget? BUT…once it is set, the work isn’t over. I will explain why in a minute.
Steps to Set an Effective and Successful Budget:
- First, you will be setting a budget on these three categories: Bills – the fixed bills you have each month like mortgage/rent, utilities, etc. that you have to pay each month to live, Living Expenses – these are the other needs like food, clothing, etc. where it is different each month and you control the amount you spend and finally your debts.
- Basing your budget on “what you hope to spend” is going to set you up for failure. You are going to set your initial budget by what you have actually spent in the recent past.
- With that, take your spending record from the past 1-3 months (I would recommend going from like August – October as the months of November and December are usually not normal spending numbers for most households) and find out what you spent each month in each category. Then take an average of those totals and this will be your budget for now. For example, let’s say you spent $200 eating out in August, $300 in September and $250 in October. Add those totals up, which would be $750. Then divide that amount by 3 = $250 is your eating out budget for now.
- These are the categories that you will want to calculate for your Living Expenses budget…plus add any extra missing categories that your family does/needs:
- Eating Out
- Auto Maintenance (like oil changes, car washes, tune-ups, etc.)
- Date nights/Family outings/Entertainment
- Special events/holidays (like Christmas)
- Home improvement/maintenece
- For the categories that may only have an annual expense like Christmas, Vacations, etc. – find out what you spent last year or two to calculate this year’s amount.
- For the Bills and Debts budgeting, you owe that money now to your creditors and your service providers. Write down all of your recurring payments – there are ways to reduce some of these. But just get it set for now.
- Once you figure these numbers out and get the written down – you have just created your budget.
It kinda seems like a Kill Joy… I know… you may have expected some magical plan to help you have floods of money available all of the sudden. Let’s be honest, if there is something like this, it isn’t realistic and it isn’t life-long.
BUT…no worries. We are not ending your budgeting here. This is where the really, really cool part comes in! Now that you have this written out, it isn’t a dramatic change and so you can start implementing baby step changes now. These baby step changes will add up to a HUGE change in a short turn-around time. Trust us… this will be a crazy domino effect once you get this set up right from the beginning.
We have talked about before how we were finally successful in paying off our $100K debt. In summary, we paid off $100K consumer debt in 7 years. The first 3.5 years, we were trying the crash diet approach that many financial professionals said needed to be done. We kept failing….and failing….and failing. It was VERY FRUSTRATING! In 3.5 years, we paid off $15k debt. We felt discouraged, frustrated and hopeless that we still had $85k to go and it looked like many, many years ahead of us.
One day, we sat down and started realistically talking about this. We decided let’s take it slower and chip down the budget little by little each month where it was really unnoticeable changes. Then all of the sudden….. it worked….. money was rolling in and debt was rolling down faster than ever and we paid off the final $85k in the second 3.5 years!
So what do you do now? Well, now that we have talked about setting a budget, let’s talk about taking it down little by little each month. Actually, take it down by 2%! This will be an upcoming challenge in a few days too, but that is what you have to look forward to!
You can read about the full details of finding 2% that you can cut from your budget HERE, but here’s the quick idea:
Let’s say in total, your budget is $3,000. Two percent of $3,000 is $60. In your budget, cut $60 in total – either all from one category, or like $5 from each category (as an example). Do this each month until you hit your rock-bottom budget. This will generally take 4-7 months for most of us. As the months go on, you will find some creative ways to make those final cuts before you realize that this is your rock-bottom budget. In the end, you will find that you may have several hundred dollars extra each month and the changes you made were small, gradual changes that you hardly felt. Now you can have an easier time of maintaining your new frugal budget. You didn’t go from where you are at now to hundreds less overnight, so it will be easier to maintain.
This is only part of our 2×2 plan, but is it an important and essential one!
Tomorrow we will share how to create a budget and the 2% rule on variable income. Plus, we will also be sharing our personal living expenses budget with you too!
As you dive into wanting to improve your budget (whether to pay off debt, save money, prepare for retirement, etc.) and ultimately your life, we highly recommend that you read these four articles:
- How Our Crash-Diet Budget Crashed Our Budget (Part 1)
- The Financial Controversy: Crash-Diet Mentality vs the Healthy Diet for Establishing Long-Lasting Change (Part 2)
- Time for Some Financial Ground Rules: Every Battle Requires Some Rules of Engagement (Part 3)
- Its Here: Our Personal, Secret 2 by 2 Formula We Used to Pay Off Over $100K of Consumer Debt