Summary: We went from paycheck-to-paycheck living to savings without changing income or big lifestyle changes.
I've been so happy with my new financial methods, I couldn't help but post something about it. We used to live, paycheck to paycheck. Always saying we can't afford this or that, waiting for the next bill. I kept thinking some day I'll make more money and I wont have to worry anymore. Well, waiting for money to roll in makes you old.
I decided to make a budget. A complete picture of every cent that comes in and goes out. Instead of starting with an idealized visualization of what I wanted to be spending, I pulled my spending history for the last year. Since I rarely use cash my bank had pretty much all our spending history. I calculated all the little bills including monthly, bi-monthly, semi-annually, and annually then averaged them down to cost per month.
A blank copy of my spreadsheet is here, if you want to follow along: Budget Spreadsheet
Next I separated each into a category: Living expenses such as mortgage, water, power, etc; Savings expenses such as savings account, emergency savings, etc; Other expenses like donations, date night, etc; and finally Flexible expenses like fuel and food. These are what made sense to me. I see food and fuel as behavior costs that can be controlled.
Lastly I added a section to track income. Since we only have one normal income source, it was fairly easy to enter. I just entered all the info from my pay stub. then I added a column showing what percentage of my take-home pay each line was getting. Having just this data in from of my face really underlines where my money was going, and what I could do to change it.
After categorizing all the normal expenses we had, I found we actually had money left over every month. However I could not explain where it was being spent. It just disappeared somewhere. So I categorized it into something useful! Before my budget we had very little savings. I started an emergency savings account. It was only getting $50/month, but it was more than zero. I did the same thing with a short term savings account for a new TV. I actually opened new accounts for these because if I left it all in the one main checking account we would end up spending it. Out of sight out of mind!
In the end we ended up with 4 checking accounts and 3 savings accounts at 3 different banks. Our main bank has the incoming+fixed spending checking account (no card access), the flexible checking account (debit card access), 2 savings accounts (emergency and short term), as well as my personal checking account. A credit union has my wife's personal checking account, and Smarty Pig has a savings account. For me, all this made sense to keep things separated. It could all be at one bank, it just worked out this way for us.
I setup automatic transfers and bill pay to distribute the money from each paycheck to the accounts and payees that need money. All expenses are averaged over the year so there are no surprise expenses (like HOA dues or car registration). The savings accounts are not card accessible, but still easy to get money out if we need it. I even get a personal budget to have fun with.
Most things are affordable, in small increments. The as-seen-on-TV way is to put it on credit. Have the item now, pay slowly over time. It works. Only you have to pay interest on it. If your future self can no longer afford it you're stuck. Reverse the process. pay yourself that low installment each month into your own savings account until you can buy said item. If something comes up before you buy it, you still have all your money. If something comes up after you buy it, you can walk away. That is freedom.
If you know where your money is going, you can control it! I can afford it now. It might take a little time, but no more consumer debit for us. Next up, remodeling and paying down our house. My budget gets adjusted every so often to reflect our changing lives. no big deal. But after a while you'll notice your savings account getting larger.