Now that you know how much income you are bringing in each month, the next step is figuring out where that income should go. There are unlimited possibilities on how to spend your money, and listing them all would take forever, so I will explain the ones Thomas and I use for an example.
First, we looked at what we needed to spend money on each month. The obvious necessities were rent, food, utilities and fuel. Then, we looked through old bank statements to see where else our money went in previous months. We found additional things like eating out, Target trips for household supplies, music purchases, cash withdrawals, etc. We had to decide where to put those types of things, or if they needed a category of their own. We decided to put them together in a new category we call "Extra Stuff/Cash."
Once we established the categories, we had to assign a dollar amount to each of them. Rent was easy, as that never changes month to month. Utilities were basically the same way, as they barely fluctuate, so we just looked at how much we spent in previous months and used that dollar amount. We did the same thing with fuel, since our commutes rarely differ month to month. The food budget and the Extra Stuff/Cash budget were the harder ones to figure out. Our food budget includes grocery store trips, so we looked at previous months grocery spending and then tracked our grocery spending for a few months before we settled on a dollar amount we found to be reasonable.
Remember, your total monthly budget needs to be less than your total monthly income, so now that you have an idea of how much you need to spend on the necessities (rent, food, fuel, utilities), check to make sure it adds up to less than the money you are bringing in. Our Extra Stuff/Cash budget is based on what is left over of our income after all the important bills are paid.
If your monthly budget is higher than your monthly income, then you need to look at each piece of your budget to see where you can cut back a little. When Thomas was first laid off, we discovered that our new income did not cover all of our budget, so we slowly started to work at lowering our costs. We moved to a less expensive apartment, we lowered our cell phone plan, we canceled cable TV, etc. It can be hard to give up things you enjoy, but when you stay out of debt, it is worth the sacrifice.
Next Time: Anticipating Random Expenses
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