You knew we'd have to say the "B" word at some point. That awful word that sounds like "fudge-it." Unfortunately, you can't cheat on your budget if you want to kill the debt monster and get (or make!) your financial independence back.
Some people make budgets harder than they need to be, but there's no reason to lie here: keeping track of your money is nowhere near as fun as spending it on whatever you want whenever you want. You just have to decide if you want to get out of debt or if the "b" word is going to scare you away.
Lesson 3: An affordable budget
When making your first budget, or a budget that you plan to stick to, the first thing you'll want to do is figure out how much money you have left over each month after paying all your bills.
Make another list! This time, you should make a list of all the money you spend every month. Include everything, from the money you pay for your car to the money you pay for your utilities and food. Some bills may only come once every three months, and some bills may not be exactly the same every month. Figure out how much each bill is each month, and put that amount on your list. If you pay for your car insurance every three months, just divide the amount you pay by 3 to find how much you would pay each month. If your electricity bill changes throughout the year, figure out the total amount you pay for the year and then divide it by 12 to get your average monthly bill. If you want to be safe, add a few dollars to the payment just in case.
Add up all of your monthly bills to get the total amount you "must pay" each month.
Write your total income above it. Just write down the money you actually get, and don't worry about what is taken out for taxes or insurance or anything else. If you are married, add your after-tax income to your spouse's after-tax income to get your total monthly income.
Subtract your total monthly income from the total amount you spend each month. "Discretionary income" is the amount of money you have left over each month (hopefully it's a good number!) after you've paid for everything you need.
But "discretionary" doesn't really mean "optional." This "extra" money is used for things like vacations, clothes, car or home repairs, gifts, etc. that don't really come out of your monthly income. It's also where the money for your savings account comes from.
If you don't have any money left over at the end of each month or if you make less than you spend, you need to change something. You might have to stop paying for cable TV or find a different job until things get better. If you don't do anything to fix this, you won't be able to make more money than you spend, and you won't be able to get rid of the debt monster.
On the other hand, if you have a positive number of discretionary income, you can multiply that number by 12 to get your annual discretionary income. With this number, you can divide this money up to pay for "little things" like entertainment, cable TV, car repairs, and holiday shopping.
