Whenever you experience a life change – a raise, marriage, divorce, new child, child going off to college – you should adjust your budget. That way, it reflects where you are in life. You should adjust your budget when…

You get a raise

If you don’t adjust your budget after getting a raise, chances are you’ll end up squandering the extra money instead of making good use of the money. If you just got a raise, you’ll need to increase your total monthly income. Then, decide how you’re going to spend the extra money. If you were making ends meet at your previous income, it’s a good idea to use the extra money to pay off debt or save for retirement.

You get married

Soon after you tie the knot (and possibly even before), you and your new spouse should sit down together and create a household budget. Decide how the two of you are going to use your incomes to cover the expenses. Even if you don’t completely combine your money, it’s important that the two of you decide who’s going to pay for what household expenses. Each person should continue to have a budget for their separate incomes.

You get divorced

Divorce isn’t always an easy situation, especially if you’ve been depending on two incomes to make ends meet. If you’ve been awarded child support or alimony, add that amount into your monthly income. Similarly, if you have to pay child support or alimony, include the amount in your monthly expenses.

You’re expecting a new child

A new child comes with new expenses. Your grocery bill will increase. You’ll spend more money on clothes and shoes. The baby will need diapers, wipes, etc. Perhaps you want to begin saving for college. As you start thinking about spending money on your new addition, include those expenses in the budget. Otherwise, you could end up spending more money than you can actually afford to.

You get fired, laid off, or you quit your job

Adjusting your budget is crucial when you experience significant decrease in income. Hopefully, you have an emergency fund you can depend on to help bridge the income gap until you find new employment. It’s a good idea to cut back on your spending until you have steady income coming in again. That way, you make the most of your emergency savings, unemployment income, or other income you use in your time without a job.

You buy a new house

This is another type of addition that should be budgeted for. Not only does a new house come with a mortgage and homeowner’s insurance, you also have property taxes and maintenance to think of. Your electric bill could increase if you’re moving to a bigger home than you lived in before. It’s a good idea to set aside some money for emergency home repairs like a leaky roof or plumbing error. When you rented your landlord paid for those things, but now they’re your responsibility

You retire

As you prepare for retirement, review your accounts to find out what your monthly retirement income will be. It may be less than your current income and, if so, you’ll need to adjust your expenses to make sure your retirement income will cover everything.

Let Your Budget Change With You

Anytime you experience an increase or decrease in your income or your expenses, you need to adjust your budget to make sure you continue using your money wisely. If you notice that you don’t have enough money to pay your expenses, there’s a sure sign it’s time to go back to your budget. You could have forgotten to adjust your budget with a major life change or you may have increased your spending in certain areas over a period of time. The key is to recognize the problem as soon as possible and use your budget to get your money back on track.

When you use your debit card, it’s hard to keep an idea of your account balance. You can swipe to your heart’s content and won’t know whether you’ve overspent until you take the time to check your account balance.

Cash physically disappears when you spend it, so it’s impossible to overspend. With a debit card, you can continue spending until you drain your account and the bank won’t stop you.

Instead of using your debit card to make purchases, withdraw cash from an ATM. That way you’ll always know how much money you’re able to spend. Seeing how much cash you have – or don’t have - will help you resist impulse buys.

I have the same view about budgets. Budgeting doesn’t mean you can’t spend any money leisurely. If you try to budget that way, you’ll end up feeling deprived and splurging on impulse. Then, you’ll think budgets don’t work and you’ll give up trying all together.

When you make your budget, allocate some money, even if it’s just $5-$10 to spend recreationally. Don’t go overboard though. Make sure all your obligations are met, then budget your “fun” money.

Once upon a time, I would spend right along with them and not think anything of it. Now, things are different, I’m working my way toward entrepreneurship and spending like there’s no tomorrow won’t get me there. What will get me there is being smart (and frugal) with my spending.

Whether you realize it or not, the people you hang around can influence your spending, even if they’re broke. People without money expect you to spend your money on them. People with money expect you to spend money with them.

You have to be careful of how your friends, and even your relatives, influence you to spend your money. If you don’t have a budget or clear money goals, you’ll be easily steered to spend more money that you should.

Set a budget and stick to it. Decide at the beginning of each money how much you’re going to spend on dining out, entertainment, and other leisure spending. Once you’ve spent that amount, stop spending. Don’t make excuses to keep spending, like “Oh, I’ll spend less in x category” or “I’ll cut back next month.” Be disciplined with your budget and learn to say “No.”

Be willing to change your friends if their spending habits continue to poorly influence you. You probably won’t have to make an effort to change your friendship. They’ll likely stop calling you to go to go out on the weekends when you say you can’t afford it.

Looking back, managing weekly and bi-weekly paychecks was the hard thing. When all the bills are due at the same time, most people end up spending one of their entire paychecks on the bills. Then, there’s nothing left to save or even spend on food. Then, because they’ve been broke for two weeks, they tend to splurge the second paycheck and they end up broke again. That’s no way to live. So, I’m going to tell you two ways to manage your monthly bills when you get paid on a lesser timetable.

Scatter Your Due Dates

Instead of trying to match your paychecks to your due dates, make your due dates match your paychecks. Call some of your creditors and ask them to change your due date. Leave some at the beginning of the month and pay them out of one paycheck. Change others to the middle/end of the month so you pay them out of another paycheck. That way you’re not paying all your bills with one paycheck.

Build a Buffer

Build up the balance in your checking account so you have enough to cover half your bills when they come.  This might mean living frugally on a couple of your non-bill paychecks for a month or two.

Let’s say you get paid twice a month.  Your first check typically goes to bills while the second paycheck gets blown.  This month, leave half of your second paycheck in your checking account.  When the next month comes around, you’ll already have some money in your account, so you can use less of your first check toward bills.  You’ll have some breathing room.  Continue to leave part of both checks in your account, so you don’t have to use all of one to cover bills.

Fold the paper in half.

On one half, write down your monthly income. This includes wages (after taxes), child support, alimony, money from hobbies, whatever you bring into your home each month. Add it all together and label that number Total Income.

On the other half, write down your expenses. Include everything you must pay for during the month – rent/mortgage, utilities, food, transportation, day care, child support, alimony, etc.  Add those up.  If you have money left over, allocate most of it to savings, then entertainment, clothing, and hobbies.  It’s ok to use your money leisurely when you have enough of it.  Finally, add together all your expenses and label it Total Expenses.  Your total expenses should equal your total income.

There you have it.  Your simple budget.

You’re not the only one.  People do it all the time.  That’s why there are so many financial magazines, websites, and blogs out there.  People need financial guidance.  They add unnecessary complexity to simple things, then wonder why the thing that used to be so simple has become so difficult.

And here it is, the one thing that will always keep you from being broke - Never spend more money than you make.  If you make $100 a month, only spend $90.  If you make $10,000 a month, only spend $8,000.

Before you try to correct me, yes, it is possible to spend more money than you make.  You can dip into your savings, use credit cards, take out payday loans, or borrow from friends and family.  When you live like this, you’ll end up drowning in debt in no time.

This is the point where most people begin to argue and say, “I can’t help but spend all my money, I have bills to pay.”  The latter part of that statement is quite possibly true.  The first part, however, is almost always false.  You feel like you have to spend all your money, but you don’t.

There is a very easy way to make decisions about what to spend your money on.  Ask yourself what will happen if you don’t spend that money.  If the answer doesn’t lead to death of you or a loved one, don’t spend it.

Next, don’t try to disguise luxuries and necessities.  Food, you must buy.  Steak and shrimp, you can live without.  Clothes, you must buy.  Designer jeans, you can live without.  Electricity, you must buy.  A thermostat set to 60 degrees in the summer, you can live without.  Do you see how easy it is to spend all your money on frills?

Put your income and expenses on paper where you can see them.  Use cash to pay bills and buy groceries if you have to.  Whatever it takes to get your spending under control and make sure you never go broke again.

Making the Variable Income Budget

Total your monthly expenses just as you would if you made the same amount every month.  Add up housing, transportation, food, utilities, clothing, insurance, debt payments, and other things you need to live.

As for your income, average what you’ve made for the past year.  Use your recent bank statements or last year’s tax return to figure out how much you bring in.  When you’ve come up with an average income, use that the “income” part of your budget.

Add to Your Savings

Having a healthy savings account is the only thing that will make variable income budgeting work.  Think of your savings account as an insurance plan that will cover your expenses when your income isn’t enough.  Before this insurance plan can work for you, you have to build it up.

Any month you make more than your average income, put the extra money into your savings account. 

The months that you make less than your average income, use money from your savings to cover the bills.

Avoid overdipping into your savings for spending money, especially during the months that your income is less than average.  By “spending money”, I mean money to spend on unnecessary luxuries like a new tv or pair of shades.

Build a Fat Emergency Fund

When you live on a variable income, your emergency fund should be higher than if you had a more steady, reliable income.  Having six months to a year’s worth of living expenses will keep you afloat if anything happens to reduce your income.

It’s a good idea to keep your emergency fund separate from your “living expenses” savings account.  While your savings account is used to float you during the months when your income is less than average, your emergency fund should be used strictly for emergencies, like unexpected medical bills or car repairs.

Variable Income Budgeting Tips

If you have a job that has a base salary + commission, build your budget using your base salary.

If one spouse has a fixed income, build your budget using that spouse’s income.  The variable income can be used to build your emergency fund, pay off debt, or save for retirement.

How Envelope Budgeting Works

Start by writing out your budget on paper.  Decide your spending categories (e.g. food, rent/mortgage, utilities, etc.) and how much you will spend in each category each pay period.

Then, make an envelope for each spending category.  On the outside of the envelope, write the name of the category.

Each pay period, divide your money for each spending category based on your budget and place the money inside the corresponding envelope.  When you’re ready to spend, take the money from the appropriate envelope.

Envelope Budgeting With Checking Accounts

Envelope budgeting works best with cash since the physical absence of money from an envelope will keep you from spending it.  However, the world of direct deposit and debit cards, managing your money this way can be difficult.  Here’s some suggestions.

• Don’t deposit your checks (or withdraw your direct deposits) so you can manage with cash.  Then, if you prefer to pay certain bills with check, deposit the money before paying the bill.
• Open multiple checking accounts.  If you have several spending categories, I don’t suggest opening a checking account for each one.  On the other hand, you might open a second checking account to separate bills and other necessary expenses from spending money.
• Use an envelope budgeting software to help categorize and manage your spending.

Tips to Make It Work

• Stick with it.  It might take a few months to get the system to work for you, so don’t give up too soon.
• Get the family involved.  Make sure to include your spouse and children.  Even if your kids are too young to spend, you can explain why you’re diving the money and spending from envelopes.
• Don’t throw away leftovers.  If you have money left in an envelope, put it toward savings.

Have you ever considered giving yourself an allowance?  Separating “bill” money from “spending” money can help keep you within your budget and force you to make wiser decisions about spending money.

Physically separating your spending money, either by withdrawing the cash or by putting it in another account, will allow you to spend without tapping into your bill money.

How much should you give yourself as an allowance?  Subtract your expenses and monthly savings from your income and that’s the amount you’re allowed to spend each month.