I used to carry around my monthly budget with me everywhere I went: a page printed for every month, hole-punched and bound in a blue folder. Compared to the many electronic personal budgeting tools available today, my "blue folder" budgeting system was rather archaic. Nevertheless, it was effective because it employed the most basic components of the paycheck life cycle. It boils down to this:
Paycheck – Fixed Expenses – Variable Expenses = Net Income
- Fixed Expenses: These are your monthly expenses that are the same (or close to it) every month and usually only occur once per month. Examples are your mortgage, car payments, insurance premiums, cable, internet, cell phone, etc. If possible, try to schedule your payment of these bills first thing after you get paid (preferably electronically; save paper and give yourself a break!)…it helps to see that the money is gone from your grubby little hands!
- Variable Expenses: These are your expenses that fluctuate from month to month, and are usually ongoing throughout the pay cycle. Examples are groceries, gas, dining out/entertainment, clothing, gifts, etc. If you have a well-functioning budget, you allocate a certain amount of your paycheck to these items every month, and stick to it.
It's important to remember that every dollar of your paycheck has a "job" and to prioritize those jobs in proper order. This is particularly imperative if you are in the midst of a financial goal such as paying off debt, putting aside an emergency reserve or building up your savings account.
Such situations should be considered fixed expenses in your budget and paid as a priority after you receive a paycheck—get rid of it first thing, so at the end of a pay cycle you can't claim that you don't have enough money left to do it!
Planning vs. Impulse Spending
It's always an interesting exercise to take a look back at a few months' history of your spending habits. More than likely, you'll surprise yourself to see how much you spend on non-essentials. If you are actively working to achieve a financial goal like debt reduction or savings, it is imperative that you train yourself to have the financial discipline to resist impulse spending outside of your budgeted allotment (another blog topic for another day!)
If you're not currently working toward a goal, it's still good to set some boundaries for yourself. Incorporate an "impulse spending" fund into your budget (does that make it "non-impulse-impulse-spending"?) If you don't spend the amount budgeted in the pay period, set it aside in a separate account to save for larger purchases down the road.
Whatever is left of your paycheck after your fixed and variable expenses is your net income. Ideally, there is something left, otherwise that puts you in the "paycheck-to-paycheck" category…this is a dangerous place to be. If this is you, it's time to get serious about budgeting.
There is always the "blue folder" method, but save yourself time and energy by checking out some of the many great (and free!) budgeting tools available online, such as Mint.com. Be sure to check your bank's website too—many have their own tools as well!