Everyone wants to know how I come up with the amounts I put in people’s budgets.  Even though I’ve put the interactive budget worksheet and instructions on this site, people are still writing to me, burying me in numbers and asking me to make them a budget. Or they’re asking me for guidelines on what they should be spending on things like food.

Making a budget is a bit like doing a puzzle… you have all the pieces, and you just have to get them all in the right place. Maybe that’s why I enjoy it. But making a budget doesn’t always mean getting it right on the first go. Sometimes you have to move those pieces around to make it work.

The first place to start is just to throw the numbers on to the budget worksheet and see where they all settle. That’s what I ask couples to do when they’re sending me their info (for the show)… I want to see how they think they’re spending their money. In every single case but one (Nicola from Season 1), people haven’t had a clue where their money is going. That’s why I tell people to do an assessment of how they’ve been spending their money. You can do it one of two ways:

•  Track your spending for a month or three, or
• Review your spending for the past six months. This is my preferred method since six months’ worth of info is far more revealing.

Okay, so let’s say I’ve got some numbers to work with.  I plop ‘em into the budget. Then I set to work making it balance. 

When you compare the Original budget with Gail’s budget you’ll see some significant differences. Here’s my process.

When I look at the bottom on the Original budget I can see the over-spending problem in black and white. So I start by dropping in all the Fixed Expenses, keeping them the same.

Next, I add in the money this couple should be saving for emergencies, their long-term retirement needs, and their two kids’ educations. These “savings” amount aren’t after-thoughts… they go into the budget right off the bat.

I also look at the amount going to debt repayment, and if it isn’t enough to blow off the debt in 3 years or less, I up the amount until there’s a light at the end of that tunnel.

Next, I drop in the Variable Expenses, adjusting the amounts down until the budget balances. Some things I kill completely. If you’re in debt, you can’t afford booze, cigarettes, chips, coffee, lunches out. You will have a very limited entertainment budget, and you’ll have to have all your fun (sports included) out of that money. Food gets chopped back, but not to an unreasonable amount… it’s important that everyone eat well. But that means no one gets to eat out!

When I look at the bottom line, if the budget still doesn’t balance, I go back over it looking for other places to cut back. This is when the Fixed Expenses come under the knife. Cut your cable. Cut your phone bill. Cut your utilities. Consolidate your car and home insurance, raise your deductable and cut your insurance premiums.

There’s no such thing as “cash” anymore since that’s not a real budget category. Some people like to give themselves a “cash allowance” that they can spend any way they want, but that’s a license to shop unconsciously.  If you’re spending the money, you should be thinking about it. You had to work hard for it and no unconscious spending is acceptable, particularly when you’re in debt.

There are some categories people cut back on so the budget will balance, knowing full well that they’ll have to spend the money even if it’s not in the budget! They create a budget they know won’t work because they don’t believe any budget will work. So they leave out categories like clothing, home maintenance, fun, family gifts, medical, and car repairs. People, crap happens, and some things you need to spend money on just because you do. It makes much more sense to make a plan and stick to it, than to make a plan you know won’t work. Yes, you may need to adapt on the fly if your “car repair” money hasn’t built up enough to cover the cost of the new tires you had to buy.  But it’s unlikely that you’ll have to buy new tires, repair the roof, buy the kids new shoes, and cover a birthday all in the same month… so as long as you have enough of a “float” in those we’ll-spend-it-eventually categories, your budget will work.

Okay, so that’s how I do it. There are no formulas… it’s a matter of what each person or family needs. While one family may be able to survive spending just $100 a month on gas, another may have to spend three or four times that… so there’s no Right Amount Rule for any category… it’s a matter of need and the amount of income available.

The bottom line is that you can’t spend more money than you make. If you can’t get the budget to balance you either cut costs or make more money. Debt has to be repaid. And you have to save something both for emergencies and for the long term.

Once this family is debt free, the $1,400 used for debt repayment can be reallocated to increase savings, plan for bigger purchases – new furniture, bikes for the kids, a vacation – and to create wiggle room in the budget. Upping categories like maintenance and entertainment by 25-50% means more money available to take care of problems and have some fun.