The Best Budget To Crush Debt!

Preface:

Over the years I have looked into and tried MANY budgets. Some are better than others. This is the first one that has truly worked with us and for us. I will be totally honest, it won’t work for everyone. There are too many variables for there to be a one-size-fits-all budget. The people this will work for are single folks or couples who have steady and reliable income of some sort. If you are fully commission based or freelance with inconsistent clients, this is probably not the budget for you.

Nitty Gritty:

For those still with me, here we go! We are going to learn how to set up a budget based on your annual income.When I was taught this method by a friend, it literally changed my life. I’m dead serious. They should teach this in school. If you read my post about how we utilize multiple bank accounts to prevent overspending, then you may be wondering how much you should be putting into each account or category. I’m going to break it down into steps, based on how we do it. However, it can easily be modified to suit various situations as long as you have a steady stream of income. Meaning, even if one person gets paid bi-weekly and the other get’s paid once per month, it will still work. Also, it make look crazy at first glance but if you passed 3rd grade math, then you got this!

For Context: We have 5 bank accounts and we break them down like so:

1. Bills Account – Both of our paycheck are direct deposited into this account each month. All of our accounts are linked to this one so at the beginning of the month we transfer money out of this account into the accounts below. Besides that ONLY bills come out of this account.
2. Grocery/Fun Account – This account gets a specific amount each month for groceries, eating out as a couple and things like going to the movies etc.
3. Savings Account – We’ve always had this but now we put a specific amount in there each month
4. Kendall’s Account – We each have our own spending accounts. We each get a specific amount each month and it pays for eating out on our own, our gas and anything else we prefer to purchase.
5. Stephen’s Account – Same as above. We know exactly how much we have to spend and we can use this designated amount on whatever we want, guilt free. When the money is spent, it’s gone until next month. No borrowing from the month in advance.

Step one:

Figure out your NET take home pay for the next 12 months. You do not have to start this in January. You are simply thinking a year in advance from today. Do not include bonuses or potential over time in this number. This is your expected guaranteed money at it’s bare minimum. *Again, if you are totally freelance or commission only, this may not be the best budget for you.

Example: After taxes let’s pretend the take home pay for my household is $80,000. 

Step two:

Add up your non-negotiable bills that occur each month and multiply by 12.

Example: 
Rent: $1000/month = $12,000/year
Daycare: $500/month = $6,000/year
Car Payment: $200/month = $2400/year
Internet & Services: $60/month = $720 (I include Netflix & Hulu in this because we don’t have cable)
Also, do a rough overestimate of your utilities; power, water etc. Let’s pretend those total $2,280/year
TOTAL: $23,400

Step Three:

Write down all of the things you want/need to save for. This may include new tires and brakes on one of your cars, a certain amount for car tags, vacation money, your child’s seasonal athletics, a back to school clothes allowance, gifts for christmas, anything you can think of that you may want to budget for in the next 12 months.

Example:
Susie’s Summer Softball League: $500
Back to School Kid’s Clothes: $600
New Tires and Brakes: $600 (you may want to even call and get a quote for something like this)
Vacations: $3,000
Gifts: $500
Car Tags: $400
Miscellaneous Unexpected: $1000
TOTAL = $6,600 

Step Four:

Subtract Step Two & Three from Annual Income:

$80,000 – $23,400 – $6,600 = $50,000

Then, $50,000/12 = $4166 per month is what you have left per month to spend on food, gas, fun money, paying off debt or funneling into savings or investments. It depends on your personal situation. These are just example numbers but in this scenario I would break it down further like so:

Personal Account 1: $550
Personal Account 2: $550
Grocery Account: $566

And the remaining $2500 would be devoted towards debt. Did you read that? $2500 PER MONTH that could go towards debt or in the future when everything is paid off, towards savings and investments.

Step Five:

Home Stretch guys. We are going to refer to the totals from step two and three to figure out how much should go into the Bills Account and Savings Account.

To figure how how much money needs to be in the bills account each month we are just going to divide the total from step two by 12.

23,400/12 = $1950 That’s how much you need in the Bills Account each month. 

Now do the same thing with step three’s total:

6600/12 = $550 This is how much you need to move into Savings Account each month so that you will always have cash on hand for those things you wanted to budget in advance for.

I’m going to harp on this for a second because I think it is SO important. This is critical for those of you who are paying off debt like we are and want to implement this type of budget. It prevents you from creating any further debt. Which is the whole point of budgeting right? So, don’t shaft step three. Try to think of everything you can when you do that section!

And there you have it. A couple of things I want to note: You can totally redo the budget before the end of the 12 months if something significantly changes like a major pay increase or decrease. Just consider what you already have in savings and adjust the numbers. 

Maybe I should create a worksheet to visually simplify this? Would anyone like that? Comment if you would!