Person X, with no one to support but himself and his heavy credit card debts. He wants to clean
up the mess he has gotten himself into without losing the essentials.
1. Calculate your Income
The first thing he does is calculate exactly how much money he makes on
a monthly basis. In his case, he makes about $20,000 (after taxes)
yearly. He has no other income or money coming from any other source.
By dividing by 12, he gets his monthly salary: $1,666.66.
He also uses this principle to divide up any costs he may have had had over a
yearly period, just so that everything works on a monthly basis.
At this stage I will recommend you to download our Personal Budget Spreadsheet (Yearly Version)
or Personal Monthly Budget Worksheet and follow it
up as you read.
2. Decide what you HAVE to pay to survive
He decides to make a list of those things, every month, that he
absolutely needs to survive. In doing this, he comes up with the
4. Bills for heat and electricity
5. Car maintenance/payment/gas
3. Decide how much this costs monthly (Calculate your Essentials Expenses)
Some of the things are already set like rent. But most everything else
fluctuates monthly. However, this fluctuation is not so much.
This is why Person X decides, one month, to note down EVERY expense for
ANYTHING he bought (even small items). This gave him a pretty clear idea
of how much he spends in the categories above.
He also digs up old bills for a period of a couple of months for things like heating and
electricity and calculates the average but adds a little to cover times
when it may be more than usual. Now he fills in these categories.
Now Person X knows that every month, he must
set aside $1100 for basics. He doesn't even have to use the credit card,
since he knows this is how much he will need.
4. Determine and calculate your non-essentials (Calculate your
Person X lists the non-essentials-things that he spends on that aren't as necessary:
1. recreation-this includes trips to restaurants, video rental or purchases, etc.
2. gifts-weddings, etc.
3. long-distance calls (to mom and dad-back in New York)
He thinks about his latest trips to restaurants and decides to start
eating more at home, perhaps picking up some cooking skills by trial and
error, to cut down his restaurant eating costs.
For gifts, he decides to allocate a small amount every month so when necessary, there
will be enough for it.
He does some calling and gets a good deal and reduces his long-distance bill by paying a flat rate for a certain
number of hours every month.
So the picture stands:
For non-essentials, Person X spends this amount:
So the total so far is at:
5. Establish categories for Debt elimination, Charity and Savings
Since Person X is serious about giving charity, eliminating his debt
and wants to have some savings as well, he decides that these are
categories that have to be included as well.
After fiddling around a bit, he decides on the following numbers:
A sample Budget sheet for Person X now, that includes all of his
Some Things to Remember
1. Numbers are flexible. Experiment with getting cheaper options for
things, even for essentials. If, for instance your rent is very high,
consider moving. If you can, reduce your clothing bill to only what you
really, really need. Be on the lookout for ways, especially, that you
can increase the proportions of money you put in for debts, savings and
2. Don't spend unless you have it (so you can avoid
interest and unnecessary borrowing).
2. Write down every
expenditure. Keep receipts of all purchases.
3. Deal with
4. Plan for extras
5. Plan for emergencies