Saturday, November 16, 2013

Fundamentals Part II: Creating a Budget

Before we can get into the real meat of budgeting, it’s important to make a minor but very important mental shift.

Have you ever said something like this: “I get paid Friday, but that whole paycheck’s going to be taken up by the rent.” If so, you’re budgeting backwards instead of forwards, and changing this is the single most important thing you need to change in order to get control of your finances.

Let me explain:

When you’re budgeting backwards, you just pay the last period’s expenses as they happen, reacting to whatever the costs you had ended up being. When you’re budgeting forwards, you anticipate upcoming expenses and plan for them as much as possible. There will always be hiccups (your car breaking down, needing to replace something), but budgeting forwards will put you in a better position to react to unexpected issues.

In order to start budgeting forwards (or perhaps budgeting at all), you need to establish a routine. I advise doing your budget on payday, because that way you can plan what you’re going to spend before you start spending it. This is what a budget might look like for someone who gets paid bi-weekly:

Let’s get into the nitty-gritty here.

At the top (B1), I enter the exact amount of my paycheck. In the first column, I put what categories I’m allocating money to during this pay period. I usually put the expenses that are time-sensitive at the top, i.e. the expenses that occur on the same day every month. This includes rent, a car payment, car insurance, a phone bill, etc. In this sample budget, the car payment, car insurance, and Netflix will be due during this pay period, so they’re included.

A quick side note. Sometimes, you’ll have a regular major expense that occurs less often than you get paid. For example, you might pay your rent monthly when you get paid bi-weekly. Anytime a regular expense is more than 25% of an average paycheck, I usually suggest dividing it among your monthly paychecks. For example, for this budget, there’s $210 allocated to rent and utilities. By allocating $210 from this paycheck and $210 from the next, you have $420 ready for rent and utilities at the end of the month. It’s much easier to budget that way than having one paycheck where you have to allocate $420 for rent and only have the remainder to allocate towards everything else. And in case you were wondering, all months have at least four full weeks, so if you get paid bi-weekly, you will always have at least two paychecks per month.

Below the time-sensitive items, I usually put essentials which aren’t due on a specific date. This includes food and gasoline. This category has a little more flexibility because you’ll need to eat and probably drive, but if you have a thin paycheck, you can be more economical with your groceries or your driving. Then, there are important but slightly less essential items, such as non-food grocery items (shampoo, soap, etc.), and pet supplies.

At the bottom, I include discretionary spending. This is basically fun money that you can spend however you want. In my experience, including at least a little discretionary spending in each paycheck is very important. If you try to deny yourself any at all, you tend to end up blowing your budget, in the same way that if you try to go on a diet where you don’t allow yourself any sweet treats, you’re much more likely to cave to temptation and then give up on the whole idea. Generally speaking, I suggest capping discretionary spending at no more than 10% of your paycheck.

Finally, I put savings at the bottom. I strongly, strongly recommend putting at least some money towards savings with every paycheck, no matter how little. I personally try to aim for between 15% and 20% of my paycheck, but that might not be feasible in all cases. (Also, if you have credit card debt, I’d suggest putting some of that savings money towards paying it down.)

NOTE: You need to enter each allocation as a negative number. Just to check my math, I usually leave a cell at the bottom to add up how much is left unallocated. You can use this formula:


Where B1 is the cell that contains the amount of your paycheck and B12 is the cell that contains the last cell that contains an allocation.

Sometimes it can be helpful to look at your budget as a pie chart. In this case, our budget would look something like this:

Or to group it by categories:

If you need to cut down on your expenses for any reason, this can help you get the birds’ eye view for where you’re spending the most and identify areas where you can trim a bit.

Obviously, making your budget is only the first step. You have to keep to it as well. In order to track my budget, I add two more columns. My running budget looks more or less like this:

In order to make this work, you need to keep all your receipts, regardless of your method of payment. I actually prefer using credit cards over cash because it’s easier to track down a missing charge if you lose a receipt, but we’ll talk about credit in another post. You want to set up the fourth column to show how much money you have left in each category.

TIP: You want the fourth column to automatically add up the allocations and the amount you’ve spent. Enter this code into the second row of the fourth column:


Where B2 is the amount you allocated to the top category and C2 is what you’ve spent of it. If you click on the lower right hand corner and drag it downwards, Excel will automatically fill in the formulas to the rest of the cells you drag over.

In the third column, you should enter in your expenses as you go. Your receipts should be entered at least every week; I recommend every two to three days. You’ll find that you tend to overestimate how much money’s still available; I do, and I’ve been carrying a budget like this for years. Entering your receipts regularly will help you keep on track and force you to be aware of how much you’ve really spent, and how much you have left.

Now, go fourth and create a budget!

Saturday, November 9, 2013

Fundamentals Part I: Balancing Your Checkbook

Today, I’m going to teach you to balance your checkbook. This is the key first step that’s going to underpin everything else we’ll learn here.

You’ve probably seen people use the method that looks like this:

This method uses a check register. It works, but it’s cumbersome, and you need a separate register for each bank account (at a minimum). It’s also a hassle to use this method to track multiple credit cards. In my opinion, unless you’re using only checks and a debit card, this method is way more trouble than it’s worth.

Instead, I’ll be teaching you to use a method that looks like this:

As you can see, it lets you keep track of multiple accounts at the same time. I use Excel, and most of my tips will be centered around it, but Open Office or similar should work too.

TIP: In order to set Excel to format your numbers as currency, right click the column you’re going to put the numbers in. Select “Format Cells.” Pick “Currency” and choose your currency symbol and how you want negative numbers displayed, and then hit OK.

At the top of the page, you’ll put your liquid assets. This refers to accounts that you can easily access, such as your checking and savings account, but not accounts which you have limited ability to use, such as a 401(k). You should also include a section to put in any checks you’ve received but that aren’t yet deposited, such as paychecks that don’t go through direct deposit or gifts.

Below your assets, you should put your short term debts, debts that (ideally) you’ll be paying off by the end of the month. This includes any credit card balances and any checks you’ve written but that haven’t gone through yet. Finally, at the bottom, add up the assets and subtract the debts.

You want to use a formula so that any time you enter in new numbers, you get a new balance. Type in this formula to the cell where you want the total to appear:


Where C1 is the top cell that contains assets, and C10 is the bottom cell that contains debts.

And that’s all there is to it! You balance your checkbook by finding out what balance you have available to you.


Chances are, you probably know you could handle money better--and not just because you ended up on a website specifically dedicated to budgeting. Honestly, everyone struggles to handle money well, no matter how many books you’ve read, and no matter how much you earn. You will never be perfect in handling your finances; you will make mistakes, bad judgment calls, and poor purchases. However, you can learn to get better at handling your finances. The basics are even relatively simple, although that doesn’t mean that they’re easy.

For example, it’s very simple to learn how to bench press 100lbs. But it certainly isn’t easy! In other words, the skills you need to start handling money aren’t particularly difficult to learn, but they do require practice and discipline. Easier said than done, of course. But to start out, let’s talk briefly about some of the factors that may make it harder to start taking control of your spending.

One of the things that can make money difficult is that there are social and emotional factors to dealing with money. I’d like to touch on these complications before we start getting into the technical aspects of budgeting.


Money has huge social implications. Your wealth is a major factor in what social class you’re considered a part of (though certainly not the only one). People are often pressured to buy items that are considered marks of their class. For example, even small middle class families often buy SUVs, and to buy instead of rent their housing.

There are also different social pressures put on women and men when it comes to spending. For example, men tend to be pushed to show off their wealth through conspicuous consumption. This can be through any number of status symbols, from designer watches to expensive cars. For men, there’s a pressure to spend simply to show that you can.

Women, on the other hand, tend to be expected to spend as a social activity. For example, women are encouraged to shop in groups, and are often put under peer pressure to spend more than they planned. Women are also often socialized to spend as a response to emotional stress, which we’ll talk more about in the next section.


Both men and women may overspend as a result of emotional stress. However, women tend to be encouraged to do it much more than men are. How many films include a woman breaking up with her boyfriend and dealing with it by going on a shopping spree with her best friend?

Another major barrier for some people when it comes to taking control of their finances is anxiety--either in the colloquial sense or the clinical sense. Some people avoid looking at their financial records because they’re worried about what they’ll find. Some people may also have anxiety severe enough to set off panic attacks, and the fear of that can be very discouraging. (I know I once went several months without looking at my bank account because every time I thought about it, I started to have a panic attack.)

Finally, feeling depressed or helpless can be a major barrier in learning to handle money, especially for people who have struggled with money for a long time. It can be easy to feel that nothing will ever change, so there’s no point in trying to take control of a lost cause.

The good news is that the techniques I’ll be teaching here--how to develop a budget, monitor your budget, and so on--can help with a lot of these issues. For example, I find that checking my budget every few days helps me feel less anxious and more in control of my finances. It can also help control impulse and emotional spending, because you know you have limits, and you know what they are.

(That said, if you have been going through an extended period of feeling down and/or worthless, severe and repeated panic attacks, or if you find yourself unable to stop yourself from spending, you may need professional help. Many areas have resources available for those with mental health issues and who may not have health insurance or be able to otherwise afford care.)

So, let’s get started with our Fundamentals series. First up, Part I: Balancing Your Checkbook.


Before I can get started on this blog, I feel it’s appropriate to acknowledge the privileges I’ve had in the financial arena.

My family, while not wealthy for the number of children my parents have (I have five younger siblings), is solidly middle-class. I was able to get a very good scholarship to attend a four-year university, and between that, what my family was able to contribute, and my own earnings, I’ve been able to avoid student debt. I’ve also been very fortunate in avoiding major medical debts. For all these reasons, I started in a good financial position.

That said, I believe that the tips and ideas found in this blog are applicable to people in all financial situations. I hope it will be of use to you.