Budgeting is the keystone of personal finance and frugality, but for many people, it’s the hardest thing to nail down. Anyone with a spreadsheet can mock up a budget, but the difficult part is sticking to it. We’ve talked about budgeting before, in our “11 Steps to Financial Freedom” post, but I’ve been asked to talk a little more specifically about what our budget looks like, and how we stick to it.

I’ve been using various permutations of the same budgeting spreadsheet for years, and it breaks our monthly income and bills by name, amount, week, and whether or not the bill is on autopay. While I’ll be happy to provide that template if anyone is interested, it’s probably overkill for most people (I’m a bit of a lists/notes freak.) It’s also rather immaterial - it doesn’t matter what your budget sheet looks like, as long as you have one.

Once you have your choice of spreadsheet, notebook, or ledger:

• Commit. I can, and will, share my tips for making it easier, but holding yourself to a budget is a difficult thing. If you’re not committed, it will not work.
• Decide what budgeting schedule is best for you. If you have a fairly regular income, monthly budgeting will most likely work for you. If your income is irregular (you’re a freelancer, waiter, or commissioned salesperson, for example), you may need to look at a longer cycle.
• Record your standard income for your budget cycle. Include whatever you normally bring home after taxes. If you’re not on a fixed salary, take a look at your check stubs or bank statements for the last 6 months, and pick the lowest number. Do not include irregular income - for example, our full-time jobs are our primary income streams, and we pick up freelance work randomly. We do not rely on this income to pay the bills and it is not included in our budget, because it may or may not happen in a given month.
• Record your regular expenses for your budget cycle, excluding unsecured debt. For us, this includes two car payments, two car insurance payments, two mortgage payments, phone/DSL, electricity, gas, groceries, cigarettes, and mobile phones.
• Record your regular minimum debt payments. Yes, minimum payments only for now - we’ll come back to this.
• Record any irregular bills you may have. We have a quarterly water bill and quarterly student loan interest bills (since we’re both in school). We’ve also decided to get our heating oil COD this year, so that is almost completely irregular. Divide these numbers equally among your operating cycle. For example, if your quarterly water bill is $75, and you’re working a monthly cycle, budget $25 for it each month.
• Subtract your bills from your income. Hopefully, you have a positive number. If you have a negative number here, you need to take a long, hard look at your monthly bills and income, and eliminate bills or increase income. You might want to hop over to our Financial Freedom post for more tips. If you have a positive balance, congratulations!
• Establish a slush fund. Take some of that excess income and budget a slush fund for yourself. Ours is called “Personal Upgrades”. Take an honest look at your monthly out of pocket expenses, and allow yourself a reasonable amount here to cover them. This includes all those “little things” that really do add up: haircuts, breakfast sandwiches, oil changes, the occasional meal out, clothing, shoes, and, yes, lattes. This step comes before debt reduction and emergency fund building for a reason: if you don’t have some flexibility in your budget, you won’t stick to it. If you build the flexibility in, you get the freedom of flexibility with the reinforcing pride of sticking to your budget.
• Allocate excess income. Use this money to pay down debt, build an emergency fund, or invest in a lemonade stand - it’s up to you. Whatever you do, make sure that it is in line with your goals, because it will make the budget much easier to stick to.
• Live it for one month. A month later, see how you did. If you missed any expenses when you created the budget, they should be obvious, and you can adjust your spreadsheet if necessary.
• Constantly reassess. A budget is a tool to help you with your finances; it is not written in stone. If you need to make a change, make it — but make sure that what you’re doing gets you where you want to be. Case in point: I am the control freak, and therefore the keeper of the family finances. I needed to put everything possible on autopay so that I didn’t forget to pay bills each month. We made the decision to set up autopay for the minimum amounts on our two remaining cards and funnel everything else into our money market account. When that account reaches the credit card balance plus a predetermined buffer, we’ll pay off that card; lather, rinse, repeat. It takes a fair amount of discipline to leave that money alone, but we’re both committed to it, and so we updated the budget to make this change.

All of this assumes that you’ve already removed unnecessary spending from your budget and that you are not using credit cards. Accomplishing those are other posts for other days. And of course, remember, this is just how we do it. I don’t expect anyone to follow this to the letter and make it work — if it does, though, let me know?