This past week I wrote two articles about how in the past I made horrible decisions with my money; I took out payday loans that took me 2 years to pay off that debt and I completely mucked up my credit by neglecting my credit accounts. I seriously needed financial guidance, but instead had to learn the hard way. I wouldn’t recommend following in my footsteps on either topic. However, I’ve realized, through my own experiences, that the number one reason most people get themselves into so much trouble is that they don’t have a budget. They have no idea how much money they bring in each month or how much goes out.

So how does one create a budget after a melt down?

Obviously the first step is to sit down and look at your expenses. Most of the advice I read mentions sorting through receipts. However, I know that if you’re messing up your finances and living life on the financial edge,ย  you probably haven’t saved any receipts. This just gives a person another excuse not to begin a budget.

So instead, my advice is to start with the basic categories: rent, utilities, groceries, car expenses. (I’ve included a link with a budgeting worksheet that I use as a guide.) Without having receipts on hand, most people can figure out how much they pay in each category. These items are also mostly necessities (with the exception of maybe the car expenses) so reducing these amounts will be more difficult.

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Next, add up your debt total amounts. (You can use my debt worksheet as a guide.) Looking at the larger figure may be scary, but at least you’ll have an idea what you’re dealing with. Then, add up your minimum amounts due. Though the goal is to pay more than the minimum, you first need to figure out if what your budget will allow.

This is also a good time to analyze your habits. If you eat out everyday for lunch, add that to your budget. If you have a daily habit that costs money, such as smoking, add that up as well. These are the categories that can be adjusted if need be.

Finally, determine your total monthly income. Compare this amount to your monthly budget. You may be pleasantly surprised or realize that you’re spending too much on eating out.

What Next?

If your budget shows that you have money left over after basic necessities and minimum debt payments are covered, it’s time to decide how quickly you want to pay off your debt. You may have an additional $100 per month to apply towards one debt payment, or spread it out over a few while continuing to make the minimum payments on all the rest. (This amortization worksheet is a great tool to use.)

A category that should always be included in a budget is savings. Looking at what’s left over at the end of every month shows that you really do have money that could be funding a savings account. By adding savings into your budget, it won’t be something you overlook. Now is the time to allocate a set amount each month that is set aside in a savings account. Budgeting a saved portion of your income also means that amount will actually be saved at the beginning or middle of every month, instead of hoping to save what ever is left over.

However, if your income doesn’t cover your budget, it’s time to figure out how to reduce your basic expenses or increase your income.

In a follow up post, I’ll cover some strategies on how to reduce your expenses and increase your income.

Have you created a formal monthly budget? Or do you just wing it?


  1. Paying a little more than the minimum every month with the left-over savings is a good way to become debt-free faster!

    Doesn’t matter how little, just make it a habit and don’t take on new debt if possible.

    Good, practical tips!

  2. retirebyforty Reply

    I think most people has to learn the hard way. People with more experiences try to teach us, but we rarely listen. ๐Ÿ™
    We have a budget at Mint. It’s ok, we don’t follow it religiously. As long as we spend less than we make and put away saving, we making progress.

  3. @retirebyforty
    I know that a lot of people don’t follow a budget diligently and some don’t have one but are still able to control their finances and save money. Budgeting is a good tool for people like me who need more structure and a plan to save! ๐Ÿ˜‰

  4. Used to wing it, then I started budgeting. I’m sure you can guess which was a better strategy.

    My total spending hasn’t changed _that_ much, but I am definitely more aware of where my money is going, if nothing else.

    • @JT McGee – I have to say that I based my original budget off my spending patterns and just trimmed a few areas. I now have a little bit more to save. Thanks for sharing!

  5. i make my savings automatic with a payroll deduction. I have been doing this for over 35 years.

    • @Krantscents – That’s the best strategy for saving – having it auto-deduct out of your paycheck. Then you’ll never miss it. Right now I have mine auto debiting from my checking account, but will be changing this strategy soon.

  6. We make enough money compared to our spending that we wing it. Savings is on auto pilot and we make adjustments from month to month if we need to. When we were making much less money and living in a much more expensive city (half our income literally went to rent and utilities), I knew where every penny went. I much prefer not having to think about it!

    • @Nicole -Oh Yes, expensive cities. Right now, almost half of my expenses goes towards rent and utilities. It’s an insane amount that eats up a good portion of my budget. If only I could convince my husband to look into moving to a less expensive area….I’m working on it!

  7. Financial Samurai Reply

    I’ve got a formal monthly budget and yearly budget. Then I estimate my networth out 10 years and adjust the figures at the end of the year.

    The basic thing is, if I can max out my 401K, save one paycheck every month, and save 90% of any bonus money I have.. that’s good enough.

    Everything else left over is party time!

    • @Financial Samurai – You have a good plan, there. I haven’t thought to figure out my net worth 10 years out or even an annual budget. I might need to expand my budgeting methods. ๐Ÿ˜‰

  8. Financial Samurai Reply

    BTW, look into editing your Tweetmeme button in your dashboard, so it includes your Twitter handle and the title of your post. Right now, it just has the URL. Once you have that down, a lot more people will tweet your stuff!


  9. Ronald R. Dodge, Jr. Reply

    @Financial Samurai

    I wish I could financially max out my 401(k) plan. In order to do that, it would take 35% of “Actual Earned Gross Income”, and with the mortgage and raising 5 girls, not realistic to do that at this point of time.

  10. Ronald R. Dodge, Jr. Reply

    Little House :@Krantscents โ€“ Thatโ€™s the best strategy for saving โ€“ having it auto-deduct out of your paycheck. Then youโ€™ll never miss it. Right now I have mine auto debiting from my checking account, but will be changing this strategy soon.

    @Little House

    I don’t know I would say the best thing is to put into Auto-Pilot. For me, it’s not the best thing cause of seasonal effects of different things. Auto-pilot works okay for maxing out employer’s matching policy, but it doesn’t work with regards to actual savings plan. As such, I have to use the “Cash Flow Management” worksheet along with a “Zero Budget” type plan (in this case, a bit modified, but still the same basic principle on the management of the cash flow itself) to accomplish my 25% of “Actual Gross Earned Income” saving goal.

  11. Ronald R. Dodge, Jr. Reply


    Does $10.00 per month savings really help you out once you factor in retirement funding? I don’t think so. It takes so much more, thus one such reason why I set such a high percentage of “Actual Gross Earned Income” as needed to be saved, which I have it set at 25%. Of course, for me, the countable savings for this 25% is the following:

    Net contributions into retirement funds (both by the household and by the employer)

    Net contrinutions into an emergency fund (total money put into it minue total money taken from it)

    Net debt reduction (total principle of all such debt compared at the start of the year minus total principle of all such debt at the end if the year.)

    There’s 2 things to think about. In my case, this would require a net savings between $11,000 and $15,000 depending on what happens to be our “Actual Gross Earned Income”. You have to take into account various risk factors, which I’m using a 98% Confidence Interval to determine what I need to save. Second, what if you have certain events take place that may not be TRUE EMERGENCIES cause you should have been able to plan for such things, but yet, they still qualify for the use of funds from the Emergency Fund.

    This is also my #2 reason for using Networth values using accrual basis of accounting with the #1 reason being that it gives you a pretty good idea are you living within your means or not. If you are not, then you have to figure out what you have to do to get it within your living means.

  12. Wow, you totally don’t seem the type to take out payday loans.

    Thankfully, I’ve never gotten myself that deep in the hole, but I did help a girlfriend once with her budget. It was eye opening. All we did was add up the basics (rent, student loans, car stuff, medical bills) and she was already spending more than her income and we’re not even talking food/utilities yet. It was eye opening for her because she thought she was living frugally and every month would go deeper in the hole. It was then she realized small changes weren’t going to move the needle. Good article.

  13. Ronald R. Dodge, Jr. Reply

    @First Gen American

    You absolutely right. I won’t. There was one time I went into a such place to see how much they would charge me to cash a check. I was thinking it would only be about 2%. Wrong answer, it was more like 10% of the check value. As such, I said, “No thank you.”, turned around and walked right out the door. That was my first and last experience with a such place. I instead deposited such money into my saving account at the bank where I had the saving account. Yes, I had to wait out 3 business days, but it was better to wait out those 3 business days than to pay that whooping 10% charge.

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