Basic Budgeting or How to Live from Paycheck to Paycheck and Survive
Basic budgeting should be taught as part of a required personal finance course in schools everywhere. In my early marriage years, I learned basic budgeting as I struggled to survive living from paycheck to paycheck. I made barely enough money to support a wife and two growing sons and I had to learn to be frugal.
Preparing a Budget
Some people are led to believe they need specialized software or some special notebook in order to prepare a budget. It just isn't so. You can do it with a pen and paper, as long as you know how to write and do some basic math. Having a cheap calculator nearby can come in handy too.
You need to start each page with your estimated income for each pay period. Next, you need to list your expenses and subtract them from your income. What you have left is what you can save or spend on non-expenses.
Needs vs. Wants
When you're listing your expenses on your budget sheet, you need to list your "needs" as expenses and not your "wants". Your "needs" include your mortgage loans (or rent payments), utility bills, car payments, groceries and things like that. Your "wants" include things like going to the movies and other recreational pastimes as well as items you want to buy for yourself or your family.
When you're preparing your budget and you find that you end up with a negative number, the first thing you need to do is to make sure there aren't any "wants" on the list.
Creative Budgeting and Financing
If you maintain budgets for pay period of up to 3 months out, you may find that you don't make enough to pay something when it's due during one pay period but that you can in the pay period following that. The best thing to do is to try to move expenses from budget page to budget page to see if that can correct the problem. If not, short-term loans are another solution.
Getting standard short-term loans through banks or credit unions can be exercises in futility. They sometimes want information that you either don't have or can't give them. More often than not, they cite a lack of expendable income as a reason for denial.
Other options that I don't recommend without reservations are payday loans and direct deposit advances. Payday loans are provided by other than banks and direct deposit advances are provided by banks and credit unions where your paycheck is directly deposited to. The direct deposit advance is the better option. My bank charges $2.00 in US dollars for every $20.00 borrowed as the finance charge, which is then automatically deducted from the next deposit along with the amount borrowed. Payday loan companies charge much more and you have to make a special trip just to pay them off.
Take Care of Necessities First, Not Last
I know people who will spend money on themselves and their families before they pay their bills. When the debt collectors call and when their cable, telephone and other services get cut, they complain that they don't make enough money. They actually do make enough money. They just need to learn to budget wisely and stick to their budget. They also need to learn to do things to stretch their expendable income as far as possible.
Instead of going to the movies, which has become rather expensive lately, rent videos and watch them at home instead. Take up other hobbies that aren't as expensive and can consume a lot of your free time, like stamp collecting or coin collecting. I write as a hobby. It consumes all of my free time and it doesn't cost me anything more than the cost of my high speed Internet connection, which I would have anyway, and my web hosting expenses. In my case, my hobby pays for itself and then some.
Part-Time Jobs
I also know people who work part time jobs in order to catch up with their expenses. More often than not, they caused their own problems by not taking care of expenses before treating themselves to their "wants".
In my 30+ years of experience in dealing with people who survive from paycheck to paycheck, failing to create and maintain workable budgets is the primary reason they have problems that can only be solved by working at part-time jobs.
Lists and More Lists
I'm a strong proponent of keeping lists for all kinds of things. A budget is just one of those things. As I mentioned in a previous article, even holiday shopping lists should be maintained in order to remain within a budget. Spending money during the holidays shouldn't be reason to go into debt, regardless of how much you want to spend on a particular person.
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hey RT,
Very nice post on basic budgeting. It's a shame that so many people live paycheck to paycheck. I was raised to live within my means, or to live under my means and save. If you don't make enough to save, that means you need to make more or spend less.
I'd appreciate if you could teach the State of California some basic budgeting. It seems they have a serious problem with only spending what they collect in taxes, and think that if they don't have enough to cover their spending that that means they're just not collecting enough.
~ Steve, the frugal, crotchety trade show guru and source of trade show secrets
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On a totally unrelated subject, I've not been receiving any RSS updates from your website since the "Home is Where You Hang Your Hat" article.
I think it's a feedburner issue.
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Actually, it was the caching plugin at fault. For some reason it was halfway activated (didn't create a cache directory). Now I have 3 other blogs to check.
Good information. I'd also add in the complication of budgeting in a marriage. It's tough when one spends and one doesn't!
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Hehe…. I didn't want to get involved in that.
I totally agree, but I find that having a joint budget actually helps in this case – it's kind of like a contract that both parties sign up to to control spending. In our (and probably most) cases it involves compromise from both sides – one agrees to budget more than they'd like in a certain area, the other to spend less than they'd like. But it helps to defuse those periodic blowups that happen if you don't have a way of communicating about this stuff.
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You are hitting the nail on the head – proper budgeting and careful use of the money you DO earn is the key not just surviving, but thriving.
I think one thing that has helped us (I'm self-employed) is setting aside a separate account to squirrel away our 15% or so self-employment tax (FICA) another account for the property taxes, etc. Those once a year or once a quarter expenses used to clobber us, but we're ready for them as they come now.
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Wow, this needs to be sent to half the people I know in the US. I was working with a guy who had like $50,000 in credit card debt, he owned the credit cards illegally so he couldn't file bankruptcy without going to prison, and he was working while taking government disability checks, so he couldn't file taxes to boot… He was so deep over his head he had literally no way out. For some reason it all hasn't caught up to him yet, but that's the story of so many people in the US right now.
Living simply and within a budget isn't a bad thing at all, nor is it difficult. It's just the complete opposite of what we are taught to do from childhood up.
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Great information for keeping up with your finances – i'll need to send this to my wife!
And unfortunately the lists of needs have increased greatly over the last generation. You're right RT – pay the man first and play later!
Thanks.. We recently bought a home and this post really helps motivate me to start a budget.
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Great post as usual. Very good budgeting information. I am a big fan of your blog. It's on my list of blogs to visit regularly.
I'm still quite young and have never been in debt or in need of money, and never will. First of all, I'm saving a lot of money now and building revenue-generating assets so I'll be safe in the future. Plus, I'm still going to budget, and since I'm not going to have any children, life should go pretty well, ha.
Glad you've got it all figured out, mate…
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I agree with you 100% budgeting and all every day financial affairs should be taught in schools In my opinion It Is more important than alot of the subjects that they are teaching.When they leave school they are thrown out Into the big wide world with non of this knowledge
This is a timely article. Not only do I wish you could teach this to various governments worldwide, I also wish you could go back in time about a year, slap me in the back of the head and tell me what for… because I know better, yet I keep falling for the 'ole credit card trick.
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Payday loans are a big no no! I was reading up on them and most payday loan companies charge upwards of 11,000% interest per year.. It just happens to be hidden in their policies..
RT, I completely agree with you… only perhaps they should start teaching the younger ones more to do with currency and financial issues (that arent overly complex).
Society would benefit and who knows where our dollar would be.
i think one of the problems some people experience in relation to budgeting is patience and consistency. some people neglect to keep their records up to date, fall behind, are unable to keep track of where they are financially, are therefore unable to make good decisions regarding spending, and then maybe just give up on the process altogether.
it's also about making this type of tracking and planning a habit. it needs to happen on a regular basis, else it loses much of its impact.
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I actually use Excel to budget. I can budget 6 months in advance and know within a few dollars exactly how much money I can spend without going in the whole.
I had to learn the whole lesson about necessities first the hard way. I use to pay my bills and hope I had enough for food and gas. Well, I discovered that if I always ran out of money and ended up hating life. By taking care of those basic needs, when I did not have enough money it was ok. The bills eventually got paid
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This is such the way of life for so many families. We've been forced to live this way since my husband's surgery. Luckily I make good money… if I didn't, we'd probably be forced to move in with his parents. ugh.
I learned right away to change my attitudes about what I consider "necessities" and what we truly value, both financially and in our relationship. We're very fortunate to have the 99cents store chain in our area, and I now get almost all our groceries there. Brand names are no longer important. That goes for clothes as well. Discount stores and super sales have just as nice things, and we only go when it's a pure necessity. Manicures and pedicures are done myself. Expensive dinners and haircuts and outings are a thing of the past. Sound dismal? It's not. We spend more quality time together and actually enjoy walks at sunset.
The most important thing is to make savings a part of your paycheck to paycheck expenses. If the money is already allotted for savings or retirement you won't be tempted to use it. And one rainy day, you'll be very glad it's there.
When creating your budget, account for one-time yearly fees like your cars excise tax or your dump sticker or maintenance for your home's furnace.
These 'little' fees will add up and can skew your monthly budget totals.
I thought I had a good budget in my head but when I sat down to put it all out on paper, my wife and I were amazed at how much more we really needed. I can't stress enough how important it is to write it down and do a needs and wants category.
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I will keep this in mind for the holiday season!
This is a great article. Everything that you have pointed out is what I've lived by ever since I became a man. Never get your needs and your wants mixed up. Living like this has kept me from making many mistakes over the years. The outline that you have pointed out will work for anyone and should be required or adopted by all. Thank you so much for sharring your story. By the way, I lived in the Philippines back in the 80's and enjoyed living there very much and would love to go back.
I didn't learn this in high school, I didn't learn this in college. It's a must nowadays with the economy. I see a lot of online material starting to focus on this and traffic on my own frugal sites climbing. You've touched on some points that I haven't thought of so thanks for the new ideas!
I know a few politician's who should heed your advice about needs and wants!
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Great article! Setting and living within a budget is really very liberating. I've found that an envelope budget works well also. Put $75 a week cash into your food envelope and that is all you get to spend. The same for gasoline, entertainment, etc. This way you'll never go over budget…
I've heard this before – I must say it sounds like a good idea and quite easy to implement. The only drawback is you have to convert your paycheck to cash for it to work, don't you? I guess it works well for people who get paid in cash though.
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you forgot one thing Cunningham: Pay yourself first! but I guess you were aiming at people that really dont have any money to pay themselves first so they need to either spend less first or earn more then pay yourself first!
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Started budgeting about 6 years ago with one purpose to be debt free. With this crisis going on at the moment it has been worth the hard work. It has given us a safe buffer we will still feel the effects but it will not wipe us out.
Debt free living is financial dignity.
Good luck to you all over the coming months.
@ John :
"Debt free living is financial dignity."
That is a powerful statement. Unfortunately I have never lived with this kind of dignity – yet…
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Managing money wisely is absolutely essential when living on a tight budget. I use mint.com to keep me posted about my spending and gives me alerts when my checking account is running low.
but the best budget technique is to keep everything on the head, and as you said, differentiate between needs and desires.
good article.
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It's hard work really to write it all down and make sure that all things are considered but it is better than coming up short.
I have been guilty in the past of spending money on wants rather than needs first. But I've learned my lesson and I'm gonna start spending wisely. Thanks for the tips here.
Ammazing!!! I like your idea, needs vs. wants… I got an idea about that, only buy your needs to save money.. Don;t buy the things that are un-needed.
I agree, budgeting really needs to be taught in schools. I thought I knew what i was doing until i started my own business, made me realise just how important creating a proper budget can be… cash flow is king for business start ups and the only way of monitoring that is with a good, well laid out, budget
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This is something I struggle with. I'm not a budgeting fan.
I've always thought if you spend more than you make, just make more!
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Living paycheck is no fun. I had to do it for a whole year until I finally paid off my credit card debt.
It's always baffled me that public schools don't teach at the least the basics of money management. Instead, young people are expected to graduate and go into the "real" world and learn these lessons through trial and error.
I always reminder everyone – AVOID credit cards during these times – It's incredibly important.
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Great post.
I must reiterate out that if times are hard, any form of credit is a bad thing. Interest charges and fees will quickly eat into the little cash that you have.
I agree. I am determined that credit cards, loans and other forms of borrowing for everyday needs are to blame.
However, in my opinion those are not interest rates and other fees that eat all the income; rather, as many have already noted, – those are people's wants that generally exceed people's earnings but are made accessible via credit cards!
I suggest that people borrow money for vital needs only, such as health, education and housing.
What a great a tread this has been. Regarding Nigels comment "if times are hard, any form of credit is a bad thing" that is spot on if you are in a hole STOP DIGGING. Budgets are hard for most people but for people who like columns of figures and spread sheets they are real easy. If you are not one of those people just keep those budgets real simple or you just anit going do it. A very easy way is have 2 bank accounts One called "pays the bills" one called "for living off". That stops the hole getting deeper. But if you want to get out of the hole go for pay your self first (10% of your all your incoming)treat it like a bill that comes out of "pays the bills"
Stay Well Stay Happy
John
Thanks for the post… now how about a post on how to get rich so I don't have to live from paycheck to paycheck?
It is a tragedy that dealing with money is not a subject taught at schools more fully. Most of us have the poorest idea of how to handle money when we leave school.
I feel this is definitely a topic for education – but it is one of those where not only many parents have a poor grasp of the basic principles of handling money; but ditto many teachers.
I think this is one area where the government would, ideally, step in.
The fundamental principles of handling do not change; some bright person ought to be able to devise a template of "the ten rules of finance" or something similar which could be taught to kids from the youngest age for a couple of hours a year. By the time they left school most would have the hang of it.
OK – so I'm an idealist
I can do 4 rules…
Spend some of your money
and save the rest.
Get rid of the debt with the high interest
then learn enough to invest in the best.
Stay Well Stay Happy
John
eliminate debt and month to month payments wherever possible. stop the cable. turn down the AC. cut the phone off. etc. Eat off the dollar menu. Eat boxed cereal, beans and rice. A dollar saved is a dollar earned.
Budgeting is one of the most important skills in adult life. It should be taught to our children at school. I liked the lists idea, which is very helpful. Thanks.
I don't know why people choose to live paycheck to paycheck. My sister is a lawyer and one of her good friends is a lawyer.
Her friend makes a great salary, but spends all of it every month. It's mind-boggling that someone like that is one emergency away from living on the street.
I learned a long time ago that, barring unforeseen circumstances, my wife and I are the only people who will determine our financial destiny. I shake my head when I see neighbot after neighbor, both older and younger than me (I'm 38) cry about their financial circumstances. Many have great jobs and have have plenty of time to save and pay off debts.
In these days, I'm comforted that my only debt is my house and it will be paid off in 4 years. We paid off our first house in 8 years. It has taken much of discipline and even more self-restraint, but I sleep at night, even in this deep recession.
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You definitely don't need special software to make a budget, but having Excel or something definitely helps. I built a simple spreadsheet that just lists my bills and tells me how much money I have left over. Its useful because you can see what is coming in a few weeks, so you dont spend what looks like a surplus now, and spite yourself later.
Raised beds are the easiest way for you and your family to start an organic vegetable garden and save money at the grocery store. You are not only saving money at the store but you are saving on gas and your time. Walk to your backyard and gather dinner from your vegetable garden. Raised beds should always be four feet wide so it is easy to maintain. The length can be customized to fit your desires. For example you can have several beds that are 4 X 5 or have one bed that is 4 X 10. Your raised bed should be based on your needs, space and budget so that you and your family can enjoy a delicious edible garden.
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Spending money on things people don't need is a major reason we find our selves in the current situation. Like you suggest, I think the most important thing is to separate needs from wants.
Most people never sit down and look at where all the money goes. I saved some money and put it in some interest paying accounts untill it paid one bill. Then the money i did not need to pay that bill with i saved to pay another. Finaly my interest or dividends pay my cable dsl and phone. I wish i can get all of the bills paid like this.
I strongly agree with the point about personal finance needing to be taught in schools. Most of my peers will have no idea about how to manage money when they graduate college and will be unlikely to try to learn on their own.
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Hi,
I really find your article on basic budgeting useful. I guess I do not really need an accounting software such as MYOB.
Thanks.
Great article especially at this time of our recession. This will help a lot of people get through there struggles. Thanks for your time for this post!
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If more people thought like this we probably wouldn't be in a recession. This should be taught at every grade level in school.
A vary educational article. I am sure the information will be useful for many people to cope with economic hardships!
I agree get out and do what you can. Waiting around the some to help you is a waste of time!!!
Budgeting is one of the most important skills in adult life. It should be taught to our children at school. I liked the lists idea, which is very helpful. Thanks.
I think one thing that has helped us (I'm self-employed) is setting aside a separate account to squirrel away our 15% or so self-employment tax (FICA) another account for the property taxes, etc. Those once a year or once a quarter expenses used to clobber us, but we're ready for them as they come now.