To do this, you will calculate your take home pay on a weekly/monthly/yearly basis. If your work is commission based, try looking at the past few years and figuring out your average. This is NOT your gross income.
In addition to taxes/insurances/etc that already come out of your check, you will also subtract your non negotiables from your gross income.
After you have your net income number, it’s time to write out ALL of your bills. Look at a year’s worth of bills. This is the most time consuming part of this process and can be difficult if you haven’t kept good records.
In addition to your electric bill, you’ll also want to see how much you spend on clothes. How much are the kids school supplies each year? How much is the homeowners association fee? Once a year, do you pay for someone to pressure wash your sidewalk? Trim your trees? End of year teacher gifts? Every single bit of data you have on your previous spending needs to be extrapolated and categorized into a spreadsheet or just plain old pen and paper.
Once you have all of this info, it’s time to build your categories. Some common categories are:
- Taxes and other home fees
- Home maintenance
- School fees
- Extracurricular fees
- Clothing expenses
- Gift expenses
- Car Insurance/Payment/Maintenance
This list will likely be LONG! The more well established you are in life, the longer this will be. At this point, you might go ahead and start making some calls. See if you can negotiate a cheaper electricity rate. See if your cable can be bundled differently or you can drop some channels to make your package cheaper. Do whatever you can to decrease your overall bills without taking any drastic measures at this point.
Now it’s time to prioritize your bills! Obviously some of those bills are more necessary than others. Rent/mortgage should come well before your cable bill. Literally, prioritize these bills in numerical order. Starting at 1 and going all the way down the list from most necessary to least necessary.
Don’t compare this to your net income yet. That will encourage you to be unrealistic about these numbers! If you don’t have the amount you spent on clothing this year, overestimate what you think you might have. If you haven’t kept track of all the various fees/buyouts/costumes/etc you have had to pay for your children’s extracurricular activities this year, make an educated guess and overestimate if possible. Include in this list money you spend on entertainment, on relaxation, make up, golfing, going to movies, treating friends to lunch, etc. Get as ridiculously detailed as you can.
Next step, we’re going to pay these bills!
Step 1: Decide Your Non Negotiables