The easiest way to gather the needed information is to use a spreadsheet or money management computer program. If you don't have one of these programs, you can download the free OpenOffice suite of programs that includes a spreadsheet program. Go to the Apache OpenOffice website.
If you don't have a computer, you'll need some columnar worksheets, along with an adding machine or calculator.
Pick out two or three typical months from the recent past and record all your expenses. One of these months should include a time when you spend the most money. These expenses should include payments by both checks and cash.
You'll want to keep track of these expenses by various categories. You should include categories for your largest expenses even if you don't pay them very often. If you don't know what categories to use, you can start with the titles from the page links under the Reduce Living Expenses page. Then you can add any other categories that may apply. (Note: It's always a good idea to have a category for Unexpected expenses.)
If the above is too much work then just pick out a typical month, and use only four or five categories of your larger expenses. Thus you might select March for the month and use Auto expenses, Clothing, Groceries, Unexpected expenses, and Utilities for your categories.
At the top of the columns on your spreadsheet or columnar worksheets, write down your categories. If you are using a money management program, use the accounts to set up your categories. Then go through your checkbook or bank statements to record your check payments. Also, estimate any cash payments you normally make. If you think your estimates of cash expenses may be wrong, start keeping track of your current cash payments in a pocket notebook. Then you can revise this summary of expenses later, if appropriate.
There is no need to keep track of the pennies. Round off your expenses to the nearest dollar. After you have summarized the individual or estimated amounts, get the totals for each category.
It might be worthwhile to make some adjustments. If your category for Unexpected expenses is empty, put an amount in it anyway. If one or more categories have some large expenses, you might want to investigate them. Maybe part of these amounts should be put into another category. It might be worthwhile to know how much of your monthly mortgage payments are for Interest, Insurance, and Real estate taxes. Likewise, you may want to consider any large deductions from your paycheck. The more categories you use the more control you have over your expenses. (And the more surprises you may have over where all your money goes.)
If you have included expenses for more than one month then divide each of the expense totals by the number of months used. You want to arrive at an average monthly expense for each category. This will help you decide where to cut expenses.
There are several areas where you might want to cut expenses. One area is where the expenses are for non-essentials or luxuries. Another area is where the expenses are just too large for your income or don't provide much value. Finally, you might want to reduce or eliminate vices, such as gambling, alcohol, and tobacco.
You may be obligated to make certain payments, such as a home mortgage, house rent, auto loan, or credit cards. But in extreme situations, you might decide to get out of these obligations (legally, of course).
Now you have to decide where to cut expenses. However, you have to be realistic and not try to do too much at first. The first thing I would do is review all the other pages in this section on Reduce Living Expenses. This should give you all kinds of ideas about ways to cut excessive and/or unneeded expenses.
Go over your summary of recent monthly expenses and decide which expenses were excessive. List these excessive expenses using a separate spreadsheet, columnar worksheet, or set of accounts. Show a brief description of the excessive expense, if possible, and put the related amount in the proper category. After you have listed the individual or estimated amounts for these unnecessary expenses, get the totals for each category. If these expense totals apply to more than one month then divide them by the number of months to arrive at a monthly basis.
Deduct these excessive expenses from the average monthly expenses that you determined in the previous topic. Also, you might want to add an amount to the Unexpected expenses category.
Now you have your budgeted monthly expenses for all of the categories. These are the expense amounts you should try to maintain (on average) each month. If you go a little bit over in some categories in a month, you should try to reduce the allowable expenses for those categories in future months.
Following is an example of determining the budgeted monthly expenses in the most important categories for a low-income person:
Prior to this step, it's just been all on paper. Now comes the hard part, actually reducing your expenses. You'll probably have to change some of your habits and preferences. Here are some suggestions to help you.
Remember your decisions -- Review the list of excessive expense items from the previous topic. Remember not to incur these expenses any more.
Control your cash payments -- One method is to put the allotted cash in envelopes by expense category or time periods. After the cash for that category or time period has been used up, that's it.
Another method is to put a small amount of money in your wallet every day for planned expenses. When the money runs out, that's it. (I sometimes hide some money in my wallet for emergency use only. It may stay in that hiding place for a month or more.)
Pay yourself first -- If your goal is to have money for a savings account or some other fund, then pay into that account or fund whenever you receive income. If the fund has a minimum payment requirement, you can set the money aside until you have enough for a payment. Don't use this set-aside money unless you have a real emergency. (Having a craving for a pizza late at night is not an emergency. Have a drink of water instead!)
Another way to pay yourself first is to set up monthly transfers from your checking account into a special savings account.
You might want to talk to your employer about a payroll deduction for a retirement plan. (This plan is called a 401(k), 403(b), 457(b), IRA, SEP or SIMPLE IRA in the United States.)
Pay your other important expenses next -- After paying yourself first, per above, pay your other expenses in the order of their importance. First would be your obligated payments, such as the mortgage or rent, loans, and credit cards. (If you can't make your obligated payments, you need to see a credit counselor.)
Next would be your required living expenses for education, drug and medical, food and groceries, transportation, and utilities. Even though these are required living expenses, you can still find ways to reduce them.
The last priority, in my opinion, should be clothing, miscellaneous, and all the frivolous or spur of the moment purchases. Why do I put clothes with other low priority items? Because it is so easy to splurge on them. (Of course, you may disagree with my opinion.)
If it isn't practical to pay your expenses in the above sequence, you could set the money aside so it's there when you need it. By paying or providing for your more important categories before the less important categories, you can keep out of trouble and more easily reduce your expenses.
Tear up your credit cards -- This prevents new charges to your credit cards. (Using a credit card can be just too easy.) Of course, you have to pay off all the balances.
Use a shopping list -- Before you go shopping make up a list for things you really need. These expenses should allow you to stay within your budget for the month. Resist the urge to buy something extra unless it is allowed in your budget.
Eliminate most impulse purchases -- Before buying something on an impulse, consider whether you really need it. Develop a habit of putting off these impulse purchases until another day. Learn not to make a purchase unless your budget allows it.
Don't buy what you seldom use -- If you want something that you won't use very often, borrow it or rent it instead.
Look for bargain purchases -- There's no need to pay the full price for something if you can get a bargain purchase. Maybe you can find it at a dollar store, factory outlet, thrift shop, or used goods store. Maybe a coworker, family member, or friend has what you need and isn't asking much.
Saving for unexpected expenses -- Put aside an amount per your budgeted Unexpected expenses category each month. Let this fund built up until you actually need it.
Remember the good old days -- Back in the good old days, ordinary people had a simple but powerful philosophy. "If you don't have the money, you don't need it." (How did the people back in those days get so smart?)
After you have determined your budgeted monthly expenses, you need to keep track of the results. List your actual expenses for each month using a separate spreadsheet, columnar worksheet, or set of accounts. Use the categories from your budget. Use the same method of adjusting for additional expenses as used for your budget.
You might want to get the totals of your expenses week by week to see how you're doing.
At the end of every month, get the total monthly expenses for each category. Compare these actual expenses against your budgeted expenses for each category. If your actual expenses are higher, find out why. If that month has always had higher expenses, you may be doing okay. But you will have to reduce the expenses for future months to stay within your budget. Remember, the idea is to reduce excessive expenses and use the cash savings for your goal.
If you haven't been able to stay within your budget, go back to your list of excessive expenses from the Deciding where to cut expenses topic. Review this list daily until you are able to eliminate these excessive expenses during your daily shopping.
If this review doesn't work, maybe you should visit a credit counselor or financial counselor. The counselor may be able to help you stay within your budget or get your credit card payments reduced.
If all else fails and you're still going in the hole, there is always bankruptcy. However, this should be the last thing you would want to do. It really messes up your credit standing. And it may hurt your ability to get a job.
Bankruptcy in the U.S. usually allows you to wipe out credit card debt, but not alimony, child support, most tax debts, and secured loans. Also, under the new U.S. Bankruptcy Law, you can not wipe out your student loans.
You probably should talk to a bankruptcy lawyer before making a decision about declaring bankruptcy. (But you will need to have the cash to pay the lawyer.)