A budget is the first step to use towards tackling massive debt.

Budget – Necessary Step for Tackling Massive Debt

Budget sounds like a bad word. I’ve always thought of it as a limit, something I can’t exceed. I don’t like limits. I want to challenge limits. But in my current situation, a budget is exactly what I need.

I am in massive debt, as I described in my first post. Running a budget that compares income and expenses was the first major step I took towards tackling that debt.

I recently ran a budget for my personal finances. That was the first time I’ve run a budget in all my years of working. I always assumed we were staying within our means as a family, and I never really looked close at our numbers. Well, the blinders have been ripped off and it’s budget time.

The budget showed that we are doing “okay” with our finances. Okay means that we aren’t sinking right now. We have stopped the leaks and now need to find a giant pail to start bailing out the water.

Let me explain how I put together a budget.

The Income

To start off with our budget, I needed to see what was coming in the door. We are a one income family, so that wasn’t too difficult. I pulled up my recent pay stub from work, showing my take home pay for two weeks of work, and plugged that into my spreadsheet.

I used take home pay, which is after taxes, because it’s a tangible number to me. That money goes into my bank account and can be used immediately. That’s real money.

Another way to calculate your income for a budget is to use your salary. Here are some basic assumptions for the calculations…you are paid every 2-weeks, you know your salary, and you know your income tax rate.

Salary x income tax rate = tax deduction
Salary – tax deduction = take home pay per year
Take home pay / 12 months = take home pay per month

Here’s an example:

$80,000 x 25% = $20,000
$80,000 – $20,000 = $60,000
$60,000 / 12 = $5,000

That means if your salary is $80,000 per year, then you take home $5,000 per month. That assumes you are in the 25% income tax bracket, but adjust the calculation as needed.

Once I had my take home pay per month, I plugged that into my spreadsheet. Now it was time for the dreaded expenses.

The Expenses

I needed to search a lot of different places to find my total expenses every month. Lucky for me, we use our credit cards for many of our expenses. First, I broke the expenses into basic categories and then searched for details. Here are the basic categories:

• Housing
• Utilities
• Cars
• Medical/Dental
• Credit Cards
• Fixed Expenses
• Variable Expenses

Those last two categories are the catch all buckets. That’s where I have fixed and variable expenses that hit every month.

Looking at the Housing category, I found expenses for our mortgage (we own our house) and HOA (aka Homeowner’s Association). Our mortgage expense already includes the charges for taxes and insurance. Remember to add those charges if they are not rolled into your mortgage expense.

For Utilities, I included expenses for electric, gas, water, waste water, trash, home warranty, and internet/phone. We don’t have cable TV, but have internet and a home phone line from the giant provider in our area. We also have a home warranty, which serves as a small insurance plan for our home.

Next up on the expenses was the Cars category. We have two cars for our family and one car is fully paid off. That means we have expenses for a car payment, insurance, and property taxes. Those taxes are courtesy of our state.

Then we have expenses for Medical/Dental, which is the insurance I receive from my company. I work for a small company, so we don’t have much choice. It’s either expensive or more expensive. I’m sure it’s the same for most folks out there.

Next up are the dreaded Credit Cards category. I pulled up the minimum payment due for each card and plugged them into this category. This falls under the variable expense category.

Then I added in expenses for Fixed Expenses. These are things like cell phones, life insurance, and Amazon Prime. These charges don’t change month to month.

Finally, I have the Variable Expenses. These include things like gas, groceries, car maintenance, and house maintenance. I would include credit cards in this category, but I separated them out by themselves to isolate the total there.

Here is what the expenses breakdown looks like in my spreadsheet:

Mortgage (PITI included)
Waste Water Treatment (HRSD)
Home Warranty
Car – Minivan
Car Insurance (both)
Car Personal Property Tax
Medical Insurance
Dental Insurance
Cell Phone
Life Insurance
Amazon Prime

The Budget Breakdown

Now that I’ve found all of my income and expenses, I can run a rough analysis of the numbers. First I add up all of those expense categories, and then I subtract expenses from my income. That gives me my net income every month.

Income – Expenses = Net Income per month

For example:
$5,000 – $4,200 = $800

I then broke down everything into percentages of total income. So if my fixed expenses were half of my total income for the month, then I showed it as 50%. I did the same for each category. First up was fixed expenses, variable expenses, and net income to show the big categories.

I simply divided the expense category by my total monthly income. That gave me a percentage of income, showing where it was all going.

Fixed Expenses 52.5%
Variable Expenses 38.9%
Net Income 8.6%

Then I broke down the expenses further, by the major expense categories to show where my income is going each month.

Housing 25.8%
Utilities 8.2%
Cars 6.0%
Medical/Dental 9.1%
Credit Cards 24.4%
Fixed Extras 3.4%
Variable Extras 14.5%
Net Income 8.6%

When you look at these numbers, you can see that 25.8% of my monthly income goes to housing. Then compare that to the next biggest expense, credit cards at 24.4%. Yowser! So I’m basically paying for two houses each month. That’s ridiculous!

The Recap

While the word budget might sound like a bad word, it’s a necessary evil to understand where your money is going each month. Putting the expenses into percentages of total monthly income shows you exactly where your money goes.

Running this budget was a major eye opener for me on my personal finance journey and the first step towards tackling my massive debt. Next, I want to show this data on a graph to analyze the trend of each spending category over time. That’s where I start to geek out even more, as I collect more data.

Follow me on Twitter to see where I am on the journey.

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